Let's face it: Consumers primarily want over-the-top (OTT) content with network-intensive services such as Facebook, YouTube, Twitter, Skype and BBC's iPlayer together with the widest choice of stand-alone apps that are offered on operator-independent storefronts such as Apple's App Store. While many operators remain fearful of becoming disintermediated dumb pipes, operators in general will increasingly embrace OTT providers as they compete to be the preferred smart conduit. The good news is that mobile users in particular will pay a premium for superior network performance with those services that stream and chatter.
Mindsets are changing. In the post-flat-rate, all-you-can-eat pricing era the objective is no longer simply about stemming traffic flows, curtailing heavy users and blocking network abusers. Policy control will increasingly be used to assure quality, stimulate and monetize demand for higher-priced services. Operators can uniquely provide enhanced personalization, speed and quality for a variety of services including those that are Internet-based from third parties.
Stimulating increased use will, once again, become a good thing. It's simply a question of realigning cost structures with new business models, pricing and revenue generation. Recent traffic growth is scary for operators because many are still ensnared by the legacy cost structures and pricing they set for the 3G data disuse demand patterns of the mid 2000s. In face of the data tsunami, cost structures must be dramatically reduced; new pricing or alternative business models are required. Dramatic transformations are required with new network architectures and technologies including 4G RAN, fibre backhaul and IP core networks. Significant capital expenses and restructuring costs are required. New revenue formulae and forecasts need to be built. This is a risky endeavour with some embryonic and unproven business models. Operators are accustomed to business planning with extrapolations on predictable services such as voice and SMS.
But some operators are profiting from mobile broadband. For example, Softbank's data ARPU now exceeds that for voice. The company recognizes that traditional voice services are in terminal decline. Instead, it's exploiting its relationship with sister company Yahoo! Japan to maximize mobile Internet usage. Softbank is also at the forefront of network technology innovation as a leading supporter of technology convergence between LTE's TDD and FDD variants with the Global TD-LTE Initiative (GTI). This will help ensure lowest costs for mobile broadband networks and devices.
OTT has prevailed on the fixed Internet and most indications are that things will be little different on mobile. It's the very same aforementioned names that lead in both domains. Operator attempts to constrain users from obtaining what they want are doomed to failure in a competitive marketplace where one or two among several operators will always seize a competitive opportunity to let people have what they want. Operators can ensure adequate service quality is achieved for OTT services with guaranteed bandwidth and latency service tiers, while also contributing additional capabilities including presence, location, charging and billing.
Nothing could be more OTT than Skype: It rides for free and cannibalizes the voice telephony cash cow and yet several operators have partnered with it. Among the five panels and 27 speakers I moderated at the Mobile World Congress trade show in Barcelona, Spain, last week on various topics including mobile broadband profitability and OTT services, I was particularly interested in the position of Yota's CEO Dennis Sverdlov. Yota is a Russian mobile broadband provider, using both WiMAX and LTE, with no voice services legacy to consider protecting. As such, optimizing service performance for services such as VoIP from Skype is a clear and uncompromised objective. Other speakers including those from Verizon Wireless and Vodafone also recognized the benefits in collaborating with OTT providers. Verizon Wireless, like 3UK and KDDI, offer Skype access as part of its service portfolio. In the interests of minimizing bandwidth demands and maximizing service quality, radio access for Skype voice is carried over regular circuit-switched channels and so Skype is integrated with the operator networks.
Why do they do it? Providing OTT services improves an operator's competitive position. Skype users tend to be higher spenders overall and are less likely to churn. Social networking increases use of operators' value-added services. Twitter, for example, encourages SMS integration which stimulates SMS usage.
Relatively high marginal costs in mobile versus fixed broadband delivery with spectrum costs and RAN technologies make it important for mobile operators to generate additional revenues with usage. Net neutrality conditions prohibiting tiered service levels and pricing or two-sided pricing with contributions from OTT providers to operators could significantly hamper market developments. Whereas the United States remains mired in constraints and uncertainties on these matters, the UK and most likely other European nations will adopt more laissez-faire approaches that will stimulate investments in high-quality networks for OTT service delivery including video.
The race is now on for mobile operators to harness and embellish what the OTT players uniquely provide. Operators have much to offer and will be paid handsomely, but they cannot do everything themselves. OTT providers have already proven they have the entrepreneurial DNA, global scale and patient financial backing that can create the most innovate and successful content and services on the fixed Internet. It's much better to work with them than resist them in mobile.
Keith Mallinson is a leading industry expert, analyst and consultant. Solving business problems in wireless and mobile communications, he founded consulting firm WiseHarbor in 2007. WiseHarbor has recently published its Extended Mobile Broadband Device Forecast to 2020. Further details are available at: http://www.wiseharbor.com/forecast.htm