A couple of weeks ago, I attended the Mobile Asia Expo conference in Shanghai. Among many interesting topics discussed by an impressive group of industry executives, the issues surrounding network monetization appeared to stand out in terms of their importance to carrier profitability.
Several keynotes and panel sessions at the conference discussed two related problems. Despite the exponential growth in mobile Internet traffic, overall ARPUs are declining for most carriers, threatening the financial model for the further network investment that is required to match capacity demands. In parallel, OTT services such as IP-based messaging and mobile video not only drive the explosion of mobile data traffic but also massively impact carrier revenues. As an illustration, Xu Weizhong, President of Packet Core Networks at Huawei, stated that Skype “has killed $18B in Telco revenues by the end of 2011”.
One approach to the OTT issue was discussed by Dr. Choi Jin-Sung, Senior VP and Head of SK Telecom’s strategy office. Dr. Choi explained that Korean mobile carriers are experiencing decreased SMS revenues and increased network investment costs to accommodate surging traffic, caused by the popularity of free OTT messaging services such as KaKao Talk used by 37 million Koreans. In response to this competitive threat, SKT is preparing an RCS-based service in partnership with other Korean carriers and plans to link this service to other carriers. SKT is also implementing Smart Push, its proprietary technology that enables integrated management of keep-alive signals, to prevent network overload. SKT is entering into MOUs with Samsung and Nokia-Siemens Networks to promote overseas adoption of Smart Push-embedded equipment.
China Mobile Chairman Xi Guohua stated that the carrier will overcome network monetization challenges by focusing on cloud computing, faster network technology, the “Internet of Things” and its Wireless City initiatives. Xi Guohua mentioned that, while historically the value chain was dominated by operators, it now includes device manufacturers and content providers. The ranking of operators in the FTSE 500 is dropping, while others are improving. Besides the challenge of ever-increasing network pressure, Xi Guohua stated that carriers must overcome the perception that they are simply “dumb pipe” providers, embracing the fact that the traditional telco business model is facing competitive threats. Industry growth will create big opportunities for carriers, fuelled by a 2.1 billion mobile Internet customer base by 2015 driving CAGR of 24 percent. China Mobile will take full advantage of this growth through a focus on cloud computing and the Internet of Things.
During a roundtable session, the CTOs of four Asian mobile operators outlined the challenges facing their networks because of the explosion in data caused by OTT services. The new CTO of NTT DoCoMo, Seizo Onoe, remarked that it was not just data volumes but usage patterns that are creating issues. The solution, he said, was to focus on “services that only the operators can provide... to avoid being the dumb pipe.” The CTO of Australian market-leader Telstra, Hugh Bradlow, argued that challenges must be framed in terms of the user experience: “We don’t think in terms of OTT services and our own services; we think about what our customers are asking for.” He noted that Telstra’s network was a major differentiator and that he was looking to their Joyn (RCS) platform to recreate the “simplicity and reliability” of SMS.
Kaoru Kato, the new President and CEO of NTT DoCoMo, explained that much of their future focus will be on the delivery of cloud-based services, stating that cloud technology is key to realizing smartphone services. At the heart of this initiative are “network cloud” services, which will see the carrier’s network used to power intelligent services available to many devices, enabling it to avoid being marginalized as a mere “pipe” provider. Examples of these services include the “Shabett Concier” voice assistant (positioned as an even better service than Apple’s Siri) and a translation service which currently supports ten languages. Kato also highlighted NTT DoCoMo’s plan to increase value creation through convergence with other industries, mentioning partnerships in media, M2M, healthcare, finance and commerce.
During a panel discussion, there was consensus among executives from Australia’s Telstra, Japan’s SoftBank and the Philippines’ Globe Telecom that the ability to understand customer needs and price products effectively is the key to competing with OTT players. Gil Genio from Globe mentioned the need for advanced capabilities in billing and analysis, while SoftBank’s Yoshihiko Nodera said that the carrier was considering a two-sided business model combining a “communications charge” with a “content charge” alongside its tiered flat-rate model. Telstra’s Mike Wright, however, commented that simplicity in pricing was critical and it was essential not to complicate things for the consumer.
Clearly, many of the smartest minds in the telco industry are focused on these business-critical challenges. At the end of the day, however, the business models that subscribers enjoy today are unsustainable and someone needs to pay more in order for carriers to be able to make the network investments that are required. Either the OTT providers need to pay for the privilege of using the carrier’s pipes, or subscribers (meaning you, me and the billion teenagers who are driving the traffic growth) need to pay for the enhanced, value-added services that the carriers are developing.
Were you at Mobile Asia Expo? What’s your take on this question? Will the initiatives that these carriers outlined be enough to address the business challenges caused by the OTT providers? Ultimately, who will pay?