Telcos must beware comms apps

Ovum recently spoke at the Metaswitch Forum 2011 about the role of apps in telcos’ future strategies. Two of the recurrent themes at the event were the future of voice, and the increasing availability of third-party communication apps that enable users to make calls and send SMSes.

These types of apps present a significant threat to operators as they can damage telcos’ revenue streams and undermine the intimate relationship that telcos have with their customers. To counter this threat, telcos are launching their own apps, deploying browser-based communication clients, and offering rich communication suite (RCS) and unlicensed mobile access (UMA) solutions.

While white-label, customizable apps from companies such as Metaswitch can make it easy for operators to deploy these solutions, telcos must make sure that they understand the risks that they pose to their existing businesses.

Ten years ago, Vonage’s plan to offer cheap VoIP calls caused alarm bells to ring for fixed telcos. After exploring and abandoning plans to block voice over IP (VoIP), many fixed telcos used two coordinated strategies to overcome the threat. Firstly, the telcos moved from per unit pricing to access and volume pricing. Secondly, the poor availability of naked DSL solutions meant that the price differential that underpinned the business models of Vonage and other third-party VoIP providers collapsed.

Mobile operators are currently in a similar position to the fixed operators of ten years ago as third-party VoIP providers look to move in on their territory. WhatsApp has had a significant impact on the Netherlands mobile market, and other companies such as Skype, Viber, and Ping are looking to have the same impact on other mobile markets around the world.

In response to this threat, mobile operators have adopted two strategies. First, they have introduced larger call and SMS bundles to undermine the price differential between their voice services and third-party voice apps. Second, they have scrapped “unlimited” data bundles for tiered pricing, which has made it more expensive for customers to extensively use their mobile devices for VoIP calls.

However, the increasing availability of free Wi-Fi is a game changer. The popularity of home zone tariffs demonstrates that many customers frequently use their mobile phones at home and in the office, which are both places where customers are also likely to have access to free Wi-Fi. Using third-party communication apps over free Wi-Fi makes it easy for customers to make free calls, send free SMSes, and incorporate “presence” in ways that are beyond the control of mobile telcos.

Our forthcoming Innovation Radar reports, which examine the new innovations launched by telcos in the first half of 2011, found that telcos such as Lime in the Caribbean, Play in Poland, O2 in the UK, and Rogers in Canada have all launched their own communication apps, web-phones, and UMA solutions.

RCS may even become a serious option for some telcos in the near future. Ovum has also seen demonstrations of apps that can switch a call seamlessly between mobile phones, fixed phones, an iPad, and a TV, which potentially enables fixed telcos to introduce communication apps that could threaten mobile operators’ businesses.

Most of these developments, don’t involve forcing customers to switch to apps or web clients to make calls. For customers that would have otherwise embraced a third-party VoIP service, the introduction of a telco app that does the same thing will be a positive development as telcos can often provide benefits that third-party providers cannot offer. For example, telcos can provide users with the ability to move seamlessly from Wi-Fi to 3G and back, a telco-backed app would not require a new identity, and telco apps may not require users to make additional payments for communication to off-net users. In addition, if operators integrate the app with their account management functions, customer-support services, and product promotion they will be able to offer their customers a superior user experience.

The best case scenario for telcos is that their apps will outperform the non-telco apps and restore the status quo. Communication apps could also become defensive tools by disincentivizing customers from establishing a relationship with a third-party provider. Telcos could even use the apps as a spoiler that floods and confuses the market to prevent any non-telco from attaining the sort of critical mass that will pose a viable threat to telcos.

However, there are a number of considerable dangers to mobile operators that offer communication apps.

  • The apps are unlikely to generate any new revenues for telcos.
  • They could cannibalize existing revenues, in particular roaming revenues or where telcos offer cheaper services over Wi-Fi than they do over 3G.
  • They will disrupt the established calling patterns that telcos understand, pushing them into unknown territory.
  • Telco-backed apps will legitimize and publicize the opportunity to more conservative users that might otherwise have stayed with traditional telephone calls.
  • After a decade of considerable investment and intense competition in deploying 3G networks, telcos will be bypassing their 3G networks in favor of less robust Wi-Fi networks.

While these concerns have been valid in the past, the reality in the marketplace necessitates new thinking for the future. A sustained erosion of the relationship between telcos and their customers is too dangerous to imagine, and is most probably the fastest route to operators becoming bit pipes. While telco-backed apps may not improve the relationship between a telco and its customers, they will lessen the damage to the current state of that relationship.

Therefore, telcos may need to make some sacrifices to preserve their relationships with their customers.

Original article: Telcos should proceed cautiously with communication apps

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