In the first two parts of our net neutrality series, we took a historical look at the internet prior to net neutrality and how regulation and deregulation have helped shape the telecom industry into what it is today. In this last post, we’ll discuss the dramatic technological and economic transitions to a whole new spectrum of communication services in conjunction with the growth of pay-as-you-go consumption-based subscriptions.
Traditionally, the principal revenue streams for telecom operators have been voice and messaging (SMS). However, communication investments are shifting, and non-traditional providers are evolving from low-cost niche options to mainstream solutions. The growing impact of OTT (Over-The-Top) services on telcos’ voice and messaging revenue is cutting into SMS revenues.
So what is OTT exactly? Over-the-top communications applications are services that bypass traditional network distribution approaches and run over or on top of core internet networks. Skype, Vonage, Ring Central, 8×8, Netflix and Hulu, for instance, are examples of OTT service offerings.
What makes OTT so compelling is that it’s cheaper (with no subsidies to incumbent providers) and highly flexible since there are fewer rules and contract obligations to hold you back. OTT can largely be broken down into three different revenue models: SVOD (subscription-based services such as Netflix, Amazon and Hulu), AVOD (free and ad-supported services such as Crackle), and TVOD (transactional services such as iTunes, Vimeo On Demand and Amazon Instant Video).
The new OTT apps, with free or lower-cost models, are forcing the well-established telcos to respond – whether that’s more aggressive pricing or pushing increased reliability, security, performance (backed by QoS) and feature sets of incumbent offerings. Some of the largest CSPs have expanded their solution portfolio to also become content service providers. Likewise, the leading cloud service providers are becoming communication service providers.
One of the fundamental distinctions and the primary resistance for businesses to adopt OTT services is the lack of QoS. With the elimination of net neutrality, OTT providers can now offer different levels of service. One of the key tenants of net neutrality prevented service providers from charging for different levels of service. QoS is an example where unless 100 percent of the clients could receive it at the same cost, then it wasn’t allowed. In the OTT world, QoS sessions are architected throughout the entire interconnection of all the service provider networks.
Communication services are, at a minimum, inconsistent and in too many cases unbearable when the network cannot consistently guarantee QoS. Independent of voice and video communication services, there is growing intolerance for inconsistent or slow delivery of just data services. Many data services incorporate WebRTC to enable voice and video capabilities within the application experience.
On the other hand, for OTT delivery, the bottlenecks arise from one or more of the various integration points between the multiple systems that process the content: encoding/transcoding, packaging, encryption, storage [CDNs], playout, etc. With any number of different public internet data flows, the content can be transmitted depending on the overall architecture. To achieve QoS requires each OTT service session to be carefully monitored to identify the capacity bottlenecks and potential failure points and automatically implement inflight corrective measures.
OTT service providers have a fundamental problem. There is currently no way to ensure the QoS, let alone quality of experience (QoE), for video. Companies that specialize in test and measurement (T&M) and monitoring equipment for the communications industry say their customers are pressuring them for solutions. There is a large and growing spectrum of multiscreen and online video ecosystem players that incorporate and highly promote QoS and QoE capabilities. However, without QoS embedded into the network, these capabilities cannot be realized.
There is also industry concern over whether an integrated broadband and content provider can unreasonably advantage itself over competing content providers, either by selling QoS to content providers at unreasonably high prices or by refusing to provide access to QoS to competing content.
These nimble OTT players, enabled by technology advances such as smartphones, super-fast IP networks, open source platforms, etc., demonstrate a shift in consumer preferences toward their “freemium” based business models, which are seeing an increasing adoption rate.
Although they utilize the telecom operators’ network and infrastructure, they do not contribute directly to telco revenue. OTT service usage requires subscription of data pack to drive data revenue. But what’s most troublesome for the telcos is the fact that these OTT players with QoS offers will be a lower-cost substitute to their offerings and lure customers away.
When it comes to OTT, several pricing strategies have included:
Tien Tzuo, CEO of cloud-based subscription management provider Zuora, is a vocal advocate in pay-as-you-go service relationships. His company recently launched a new industry barometer – the Subscription Economy Index. SEI is designed to calibrate the growth of subscription businesses and their impact on the overall economy. It finds that companies with more than $100 million in annual revenues are experiencing the fastest growth in subscriptions, at 28 percent per annum. Software as a service (SaaS) is the most established market and remains the fastest growing at 25 percent, while media, telecoms and corporate services are growing at 13-15 percent.
For telecom companies to remain relevant in this changing industry, they must adopt creative and new pricing strategies that focus on consumers’ preferences and consumption habits. Instead of fighting the current, they must understand that the “on-demand” economy doesn’t just affect B2C companies like Uber but almost every industry that buys and sells goods and products.
In a future blog, we’ll take a closer look at how organizations should prepare for on-demand, pay-as-you-go services.
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