Traditional telcos must adapt or perish

Traditional pay-TV and telco companies are losing subscribers

and revenue to the open internet and OTT players. They need to adapt quickly to stay in the game, says Ben Kinealy

YouTube channel AwesomenessTV was purchased for $33m by DreamWorks Animation. For $1bn, Google just acquired a live game video streaming site called twitch.tv, which already captures 1.5% of all internet traffic. Netflix has crossed the 50m subscriber mark, and is still growing. For the first time ever, in Q2 of 2014, the four top cable companies in the USA had more broadband subscribers than cable TV subscribers. According to some research reports, 32% of global operators expect approximately 10% of revenues to be impacted by over-the-top (OTT) services, with 43% expecting more than 11%. Ovum’s research indicates that the telecom industry lost a combined $386bn between 2012 and 2018 due to OTT voice applications such as Skype and Lync. Moreover, evidence suggests that in some regions, popular and leading OTT applications such as Skype (owned by Microsoft), WhatsApp (Facebook), YouTube (Google) and Netflix are cannibalising service provider revenues at an even more alarming rate than originally estimated.

To bring this home, today uncontrolled and unmanaged video accounts for 60% of all traffic on the internet, set to grow to 90% in the next two years. That’s content that the network is not making direct money from, despite having to constantly invest in its infrastructure to meet demand without pushing up the prices.

These headlines and stats paint the picture – both traditional pay TV and telco companies are slowly but surely losing subscribers and revenue to the open internet and OTT players. Some are acting to turn this around, but others are frozen like a deer in the headlights, especially in the Middle East. The bottom line is that with the rise of OTTs offering compelling content and the flexibility to access it anywhere and on any device, pay TV providers and telcos are facing shrinking margins.

Traditional pay TV companies and broadcasters around the world are coming to terms with the fact that consumers no longer want to be constrained in terms of when and where they can watch content, or even having to pay for it (I’m not talking about piracy here, which is a separate but big issue). The youth of today are growing up without the concept of programming; they probably can’t even imagine a world where you can’t pause live TV. For them, platforms such as YouTube, gaming or just watching other people game online provide everything they need, when they want it, where they want it and on any device they like.

Telcos have long enjoyed double-digit growth rates, fuelled by the rise of new handheld and portable devices and the proliferation of multi-device customer behaviour. While the growing subscriber base has positively impacted industry revenues, which have risen consistently over the past few years, operating margins have shrunk. What is interesting is that in the majority of cases, this loss is being masked by an increase in revenues from broadband usage; importantly, broadband is being used not by customers accessing telco products and services, but rather for free online content and other OTT products.

This is not a sustainable business model. It is commonly known as dumb pipe syndrome, where the telco bears the majority of the costs for providing the broadband service, from actual data to infrastructure, but gets back none of the profit from the content being consumed.

This has become a flashpoint between ISPs and OTTs. Take Netflix, for example. They do not believe they should have to pay an ISP to deliver its video content, because that ISP’s customers are already paying for internet access – a point which also gets mixed up with the wider net neutrality debate. That aside, a fix has been implemented. Netflix agreed to a caching deal with ISP Comcast, and subsequently Verizon and AT&T and Time Warner Cable to improve the quality of its streaming and reduce buffering for its subscribers, papering over the cracks rather than solving the root problem.

Closer to home in the Middle East, while regional operators and pay TV providers are not entirely ignorant of these trends, they have been slow to adapt and their moves have so far remained mostly reactionary.

The surge in data usage and the associated positive impact on data revenues could be one of the prime reasons for telcos not investing in OTT services, while broadcasters have found it difficult to develop a viable business model as there is little propensity at this stage to pay for premium content among the region’s customers. Piracy has also continued to plague the industry, making it increasingly difficult for telcos and broadcasters to develop a profitable business model around online content.

On the whole, main regional providers are taking a two-pronged approach. They have set up digital communities and incubation houses to foster application development and content localisation; and they are trying to either emulate OTT services or partner with popular OTT service providers.

Emulating successful OTT services pits telcos and broadcasters directly against OTT providers, a tough fight. Although the process of developing such services is tedious and requires a higher risk appetite compared to simply partnering with the original content providers, the associated returns can be higher though the exclusivity is lost.

So far, this has only really been taken forward in a defensive manner, with operators extending their IPTV streaming and Video-on-Demand (VOD) services to OTT platforms with controlled distribution to their existing subscribers. This limits both appeal as well as addressable market for these services. Etisalat’s eLife and STC’s myInVision applications are examples of such services by the region’s two biggest telcos, while OSN and MBC have been offering access to their subscribers on a multitude of devices, through OSN Play and Shahid.net services respectively.

With increasing competition from both global OTT providers and the rise of pure-play OTT services such as Icflix and Istikana in the region, pay TV providers and telcos need to realise that offering an interoperable and ubiquitous OTT experience remains essential to driving service engagement.

Towards this aim, Zain (KSA) was the first operator in the region to launch its own IP messaging service, Hala Messenger, while Mobily launched independent OTT video service mView. Both these services are accessible to all customers in Saudi Arabia.

One area that currently remains firmly implanted within the traditional actors’ remit is sports content. Sport cannot and will not ever be as valuable as a commodity if it is not live. Therefore, owning the rights to deliver live sport such as the EPL across your network is an essential factor in adding value to subscribers, gaining new customers and reducing churn.

Here we also see broadcasters providing their own OTT services on top of telco-provided broadband services, for example, beIN Sports Connect.

So now we have a situation where OTT and open internet content is taking subscribers from broadcasters and telcos; and to rub salt in the telco wound, broadcasters moving into the OTT space are now also riding along on their broadband infrastructure. On top of it all, the next generation of internet users are spending 90% of their time consuming free user-generated content online, and shunning the traditional content providers altogether. But what can be done about this, and how can the traditional players change in order to protect and then grow their shrinking margin?

As I see it, there are a few options. Firstly, a partnership between telcos and pay TV providers is an obvious move, especially when you combine that with a plug- and-play OTT service. Secondly, telcos could move to restrict the quality of some of the OTT products their customers receive, leading to a Netflix-style paid caching deal as mentioned earlier.

Given the regulation and government ownership within the telco and broadcast sector, some OTT services could be targeted for regulation; but as we have seen with VOIP, this has not proven successful in the past, as customers either find a way around it, or worse, churn it.

     It is for these reasons that both traditional pay TV providers and telcos urgently need to change their business model. It is often said but has never been truer that content is king, and content delivered over the open internet is set to rule us all.

Ben Kinealy is the CEO of Intigral.