The rise of OTT communication apps
Last weekend, I went furniture shopping. I had my eye on a bookshelf in a particular store but wanted to shop around before making a final decision. I asked the sales assistant if I could ring back later that evening to place an order when I had decided on the matter. She said “Sure!”, gave me her name card and told me to “WhatsApp” her. Such is the evolution of our communication preferences.
Over-the-top (OTT) applications (apps) such as WhatsApp, WeChat, Viber and Skype have gained immense popularity amongst mobile users. These apps offer a low (or often no) cost alternative to traditional mobile voice and SMS services. They also include additional communication services such as video calls, group chats and non-text based communications including voice recordings and the use of “stickers” in the case of chat app LINE. WhatsApp recently announced at the Mobile World Congress that it would be adding a voice service soon. Technologies such as webRTC that allow audio-visual communication, screen sharing and file transfer services via a browser can potentially extend the reach of communication-over-IP services OTT services to non-mobile devices.
Industry analysts reported that in 2013, instant messaging volumes on chat applications have exceeded SMS volumes. In 2013 international Skype-to-Skype traffic increased by 36%, a growth rate over five times greater than that of mobile and fixed-line calls from telecom companies globally. Usage of OTT services is likely to increase with growing mobile penetration and increasing smart phone take up. Global mobile penetration is expected to reach 100% in 2014. Smart phone subscriptions are projected to grow from 17% in 2012 to 35% in 2018.1 Facebook’s recent eye-watering acquisition of WhatsApp and the acquisition of Viber by Rakuten are a strong sign that growth in this market is expected to continue.
The impact on mobile services
The migration of users to OTT apps means that mobile operators’ revenues are coming under strong pressure. According to a survey undertaken by mobile squared2, in 2013, 64% of mobile operators reported a decline in messaging revenues as a result of the impact from OTT services, up from only 28% two years before. The survey also revealed that 36% of mobile operators expected that the greatest impact on their revenues would come from WhatsApp, compared with only 7% who thought that Skype posed the strongest threat.
Facing the prospect of being relegated to mere providers of the conduits over which communication flows, operators are understandably concerned. The obvious response is to try and make up for lost revenues from their customers by charging the OTT providers. At the recent Mobile World Congress, Singtel’s Chief Executive called for regulators to allow operators to charge OTT providers such as WhatsApp and Skype for the use of their networks, or risk “being totally disintermediated”.
This stance is, however, unlikely to cut much ice with the regulators. EU Commissioner Neelie Kroes responded to the news that old-fashioned SMS had been overtaken by OTT messages by stating that the “the cash cow is dying” and that it would be “time for telcos to wake up & smell the data coffee.” This statement – as one has come to expect from Ms Kroes, made via Twitter – does not suggest a lot of sympathy for the plight of operators.
If you can’t beat them, join them?
A number of mobile operators have indeed tried to pursue a different strategy and begun to embrace OTT services, bundling these apps with their own services. This is an indication of the limited success and sluggish progress of mobile operators own IP-communication services including the Joyn initiative. Telefonica for instance announced a tie up with chat app LINE in February 2014. The LINE app will be available exclusively to Telefonica customers in some South America markets and in Spain.
Meanwhile, operators in Singapore, Hong Kong, Saudi Arabia, and Nigeria offer unlimited data plans for WhatsApp messaging, while Globe Telecom in the Philippines offers a similar data bundle for Viber. Although they will undoubtedly continue to lobby for the right to charge OTT providers for the use of their networks, at present, operators seem to be targeting data revenues from the increased use of OTT services and from OTT-off-net termination of voice calls and messages.
Can the empire strike back?
Whilst OTT apps appear to be claiming success after success, the mobile industry itself is gradually shifting towards the provision of communication-over-IP services with the roll out of LTE networks, the transition to Voice over LTE (VoLTE) and the development of Rich Communication Services (RCS). The mobile community has come up with its own RCS standard, known as Joyn. Joyn is implemented as a native app, and Joyn users can message each other via the app as well as communicated with non-Joyn users who would then receive the messages through SMS.
However, standardisation and roll out of IP-communication services by mobile operators have been slow. This is in part due to the need to upgrade core networks to include an IP Multi-media Subsystem (IMS), which would ultimately differentiate VoLTE against other Voice-over-IP services offered by OTT providers by guaranteeing a minimum QoS for VoLTE.
Such a QoS guarantee, together with much wider interoperability, is not to be underestimated. The most obvious difference between traditional mobile services and those offered by OTT providers is that the former are required to provide interoperability and guaranteed quality of service (QoS). Mobile services are regulated in most countries and minimum QoS requirements are often written into a mobile operator’s licence.
By contrast, OTT providers may be able to get away with much lower service quality, either because they focus on services where QoS may be of limited relevance, or on users who are less demanding. A low service quality may not matter in those areas where OTT apps currently dominate, but low QoS in a voice service means poor voice quality and dropped calls and may deter more widespread take up of the service, in particular by businesses. Also, as the user base for OTT services grows, the QoS offered by these apps may deteriorate as congestion increases.
It remains to be seen who will win the communications-over-IP war. OTT apps have certainly struck the first blow, but can they take full advantage of pole position?
A big question mark hangs over how the QoS of OTT services will eventually stack up against next generation mobile services, when they are rolled out. The dynamics of this fight will undoubtedly evolve with the regulatory frameworks of net neutrality and competition law.
The jury is still out on whether net neutrality will be enshrined into legislation globally. The debate wrangles on in Europe with the European Telecoms Network Operators Association (ETNO) lobbying against a EU Parliament vote on the topic; while in the US, FCC’s net neutrality rules have been overturned by a recent federal appeals court ruling. Regardless of how this issue will be resolved, the problem of discrimination will need to be addressed in one way or another.
Reminding operators that they need to face the new reality of a data-centric world is one thing – allowing them to respond appropriately is another.
Arguably, a VoLTE service may strictly speaking not be net neutral, as VoLTE traffic might have to be prioritised in order to achieve a minimum QoS. How regulators will reconcile the requirements on mobile operators to provide QoS with net neutrality remains to be seen. Allowing mobile operators to favour traffic from their own services over that of OTT providers would certainly seem to be unfair and inimical to competition.
Yet, the problem is more wide-reaching. OTT providers themselves might like to guarantee a certain service quality and charge users for the privilege. However, as long as they have to share the same pipe with other internet traffic without any prospect of being able to purchase dedicated bandwidth, such ambitions are likely to fail. The third-party nature of OTT services means that it is impossible to guarantee a certain QoS unless an OTT provider can purchase preferential traffic handling from the network operators. If OTT providers are to be charged above and beyond what they (and everyone else) pays for, they should be able to expect something in return. Net neutrality regulations however, are likely to put paid to such business models.
An open internet has its merits, but it should not stand in the way of innovation and progress. There are clear cases where discrimination amongst different types of traffic (and amongst customers) is blatantly anti-competitive an harmful for consumers. However, there also many cases where the effects are more subtle, and where there may be a trade-off between being able to reap the benefits from innovation and investment, and providing open and neutral access in order to maximise benefits for users. Ultimately, the regulatory focus should be on maximising consumer benefits. To date, consumers have enjoyed the benefits of innovative communication-over-IP services thanks to OTT providers. The challenge will be to preserve the merits of an open internet by guarding against unfair traffic management practices whilst supporting those that contribute to efficiency or increase choices for consumers.