Cellcos to lose billions to OTT VoIP

OvumReports of the death of the telephone have been somewhat exaggerated. While telephony revenues continue to fall, voice traffic is shifting rather than collapsing.
The long-term trend in the telecom industry is towards a richer and more complex communications environment in which voice serves a different function and telephony plays a smaller role.
Declining revenues are mainly due to falling telephony prices, largely a function of market maturity and peer competition rather than the much-feared over-the-top (OTT) VoIP players. OTT VoIP is not about to replace traditional telephony, but it is having a considerable impact on telcos’ revenues.
Telco voice revenues have been eroded by competition and market saturation. In our report “The Future of Voice” we forecast that overall telco voice revenues (including fixed subscriptions) will decline at a CAGR of 2.4% between 2012 and 2020, falling from $970.4 billion (€795 billion) in 2012 to $799.6 billion in 2020.
The impact of OTT VoIP on fixed voice revenues has already been significant, and we expect it will only increase in the years leading up to 2020.
Mobile operators will feel this impact even more acutely than fixed telcos. From 2012 to 2020 we expect that OTT VoIP will cost the global telecom industry $479bn in lost cumulative revenues, which represents 6.9% of cumulative total voice revenues.
Hopes of revenue uplift will be shattered
Telcos argue that it will be possible to differentiate voice offerings and add value so that they can charge a premium for services and generate new revenue streams. We are skeptical about this.
Mobile HD voice will be attractive to users, but is difficult to monetize. Operators’ unavoidable obligation to provide integrated voice and data services through interoperable standards means that services such as Rich Communication Suite (RCS) will always lag behind those of OTT players in terms of innovation and functionality.
The suggestion that LTE will enable new kinds of voice services has not been backed by any concrete plans. Most of the efforts around incorporating voice services into LTE have involved maintaining continuity with legacy services rather than generating new revenues.
The OTT VoIP market will not stay as it is for very long. Our research suggests that real time voice communications is in decline as part of a broader cultural trend – though no one is suggesting that we are going to simply stop speaking any time soon.
To date telco attention has been focused on the main OTT VoIP players (Skype, and to a lesser extent Apple) and high-profile new and potential entrants such as Google and Facebook. While these players’ offerings have so far been underwhelming, assuming that this will continue to be the case is not a good plan for telcos.
The major OTT VoIP players will themselves need to consider the impact that smaller players will have on their businesses. Current characteristics and performance metrics are not necessarily a good predictor of future success. The next threat may come from an unheralded company or one that does not even exist yet.
Pricing offers grounds for tempered pessimism
Voice now accounts for a fraction of total traffic, but still makes up a significant proportion of operators’ revenues. From this perspective, voice can be seen as a high-margin service for which monetization is unproblematic, and which still has potential for growth.
The vast majority of emerging market telephony users continue to pay on a per-minute basis through prepaid mobile services. Even in developed markets, the mobile telephony market is predominantly prepaid customers paying on a per-minute basis.
Some operators have been adept at designing and reviving pricing mechanisms (such as “flagfall” charges) that extract maximum revenues from these customers, and there is no reason to believe that such innovation will stop. These techniques are worth studying and emulating. Big bundles in mobile packages and bundling of mobile voice with fixed broadband are an increasing part of this.
The success of dynamic pricing in some emerging markets suggests that users respond rationally to price signals. While the evidence is by no means unequivocal, there are pools of unmet demand that operators can exploit to derive additional revenues from voice. Again, taking advantage of these opportunities successfully requires more sophisticated pricing mechanisms.
Jeremy Green is a principal analyst for telco strategy at Ovum. For more information, visit www.ovum.com/