The shift to mobile VoIP is inevitable— operators should proactively commence the migration towards VoIP whilst managing the impact on traditional voice revenues
Mobile VoIP arrives on the scene, much to the chagrin of operators
Just as mobile operators thought they were getting to grips with the conundrum of how to monetize the growth in mobile data, they are now being posed with a new threat: how to protect against the cannibalization of SMS and voice revenues that mobile data growth is enabling through instant messaging (IM) and mobile VoIP (mVoIP)?
mVoIP is basically the use of over-the-top (OTT) VoIP applications such as Skype on your mobile device. Three key drivers are making mVoIP a clear and present danger (and perhaps an opportunity) for operators. First, the near ubiquity of 3G and advent of LTE in many markets means a growing number of customers have access to the high data speeds required for mVoIP. Second, the explosive increase in smartphone penetration has driven a concomitant growth in mVoIP adoption, as one typically needs to download an app for mVoIP. Finally, the stark price differential between voice and data— which has ironically arisen from operators’ myopic attempts to compete on data price to protect market share and high-margin voice revenues—effectively affords an arbitrage opportunity whereby it is 50-100 times cheaper (often perceived as free) to make a one minute VoIP call than a one minute voice call. Little wonder, then, that Skype was the third most downloaded mobile app in 2011 (after Angry Birds and Facebook).
But is mVoIP really such a big threat? Well, the hassle of having to download an mVoIP app, the relative inconvenience of using it (rather than simply dialing a number) and the dodgy quality of service (QoS) one occasionally experiences when making an mVoIP call might suggest otherwise.
However, recent financial data from Swisscom and KPN in particular indicate that mVoIP is indeed starting to negatively impact traditional voice in developed markets. KPN cited an example of a typical high-value customer using 200 minutes and 200 SMS per month in 2010, falling to 175 minutes and 160 SMS per month a year later (while data usage was up from 37MB to 204MB). Admittedly, the twin effects of IM and mVoIP are at play here, and it is difficult to separate the effect of each, but the financial impact was clear–average monthly revenue drop of 20% in this case. In a more recent development, the Korean regulator has permitted operators to block or charge extra for mVoIP, after Kakao, a popular Korean OTT IM app with 36 million users launched mVoIP services. No doubt this move followed lobbying by mobile operators such as Korea Telecom, who has seen monthly service revenues per user drop by 5% in the last year.
Operators have attempted to respond to mVoIP, with varying degrees of success
So, how are operators managing the threat of mVoIP? Responses have evolved from outright blocking of mVoIP, through to permitting it, promoting it and even competing with it. A given operator’s chosen stance has depended greatly on its market positioning and regulatory conditions. Incumbent operators in highly regulated markets, such as Etisalat in the UAE, have simply blocked Skype and other mVoIP apps from being used on their networks, thereby preventing cannibalization. In competitive markets that lack the luxury of such regulatory protection, operators are wary of blocking mVoIP for fear of losing customers to more obliging competitors or attracting bad press. Therefore, in such markets operators have begrudgingly permitted mVoIP, but devised ways to soften the blow to voice revenues. AT&T in the US, for example, allows Skype to be downloaded onto smartphones, but only allows usage over WiFi.
Challengers, such as 3 in the UK, who have less revenue to protect and aspire to gain market share, have moved a step further, promoting mVoIP in an attempt to disrupt the market and drive acquisition. In 2007, 3 partnered with Skype to offer the Skypephone, allowing free Skype-Skype calls, and claimed in 2009 that mobile Skype users generate almost 60 percent more voice revenue and spend almost a third more than non-users, resulting in a margin uplift of 20%.
Finally, some operators are starting to launch their own mVoIP services to compete with Skype and other OTT mVoIP players. Only a couple of months ago, in a bold and surprising move, Telefonica launched Tu Me, its own mVoIP and IM app, after having acquired capability by buying VoIP startup JaJah in 2009. Telefonica says that the current intention is to use Tu Me to retain customers who would otherwise adopt rival mVoIP services such as Skype or Viber. Indeed, there are now 250,000 active Tu Me customers and interestingly, the third largest user base for Tu Me is in the USA, where Telefonica has no network and is effectively an OTT player on Gringo mobile networks! Whilst this is pretty cool, one wonders what the net financial impact of Tu Me will be for Telefonica. No doubt it has led to voice cannibalization, but the operator says that Tu Me might be monetized in the future through advertising or partnerships (does this strategy sound familiar?)
How can you make money out of a service that customers expect for free?
This is a critical question that mobile operator executives might well be asking at this point. Of all the options to respond to mVoIP, which one makes the most sense? Am I really at risk? If I pull the duvet cover over my head, will mVoIP go away? And if I push mVoIP like Telefonica has, and risk cannibalizing revenues, what will shareholders think?
There are a few ways in which operators could manage mVoIP intelligently and even turn it into an opportunity. These are neutralization, smart pricing and mVoIP differentiation. Neutralisation is probably the most effective way of hindering VoIP. By offering large or unlimited voice bundles and effectively removing the pricing differential between voice and mVoIP, operators can make mVoIP much less attractive. This, combined with the convenience of not having to install or use an app, or bear with the relatively poor QoS of mVoIP, effectively precludes the justification for using mVoIP. Naturally, this approach is predicated on the operator’s ability to offer large or unlimited voice bundles at the right price point, and there may be a margin trade off here. Additionally, this approach doesn’t deal with mVoIP directly, but only deflects the threat. As such, it may only be an interim measure.
The second approach, smart pricing, has become rather topical in recent months and could be a more sustainable way to manage mVoIP. Smart pricing is effectively the move away from per minute, SMS and MB pricing towards value-based pricing centred around access speed, devices and content, i.e. the things that customers really value. Swisscom and Verizon have blazed the trail in this arena, launching new pricing schemes within the last month. Swisscom has launched a range of tariffs with unlimited voice, SMS and data (with fair usage policy), but different access speeds. The higher the speed, the higher the price. This has the effect of simultaneously neutralizing the mVoIP threat (by offering unlimited minutes), blocking it (on low speed tariffs) and enabling it (on high speed tariffs). It also has the added benefit of predictable monthly bills, since there is no out of bundle spend. Verizon’s plans differ slightly— they also offer unlimited voice and SMS, but have a range of data caps. Additionally, theirs are shared bundles that enable different devices to access a single bundle, and there is a different fee for each device type (e.g. tablets are cheapest, smartphones are the most expensive). This way, customers pay according to the device they use and the amount of data they consume. These tariffs effectively stop voice cannibalization by mVoIP. The shared bundle concept could also reduce churn. Verizon and Swisscom have therefore neutralised the VoIP threat whilst simultaneously aligning revenue growth with key drivers of mobile data usage and speed.
The final approach, mVoIP differentiation, is something we have not yet seen operators pursue. Essentially mVoIP differentiation involves operators launching their own mVoIP apps and leveraging their network and billing assets to enhance the apps with unique qualities that Skype and other OTT mVoIP players cannot provide. For example, an operator might prioritise its own mVoIP app traffic over other traffic in order to improve QoS. Or it could provide high-bandwidth services such as high definition voice or mobile videoconferencing, with much higher QoS than circuit-switched voice (and for which customers could even be charged a premium). One must remember that cost is not the only driver for mVoIP. Features such as presence, conferencing, location and in-call file transfer all enhance the mVoIP proposition. Owning and controlling the network puts operators at a significant advantage when it comes to enabling these services. Proponents of net neutrality might well be raising eyebrows–but why should an operator not leverage its core network assets to its advantage?
Alternatively operators could do clever things with pricing by making calls from the app to mobile numbers on its network free or very cheap. Skype and other OTT mVoIP players could never do this as they must pay interconnect.
All these mVoIP differentiated features could help drive adoption of the app, even by customers of rival networks. Once downloaded on a rival customer’s smartphone, the app could be used to gain mindshare and gather data about that customer’s behaviour—who they call, where they are etc. Imagine having rich information about your rival’s customer base! Once an operator has an app-based relationship with its customers, this could be monetized further through advertising or additional services.
In the LTE world, there will be only mVoIP (specifically termed VoLTE), as the standard does not support circuit switched voice. With VoLTE comes new features that enhance the voice experience—video, media sharing, presence and location. OTT players are already preparing their attack. Heavy-hitters such as Facebook (through their chat function) and Apple (through Facetime) are already in the mVoIP game. Unless operators pre-empt and drive the market rather than respond to it, they could suffer badly, and then lament the tragedy of lost potential once again. Proactively and intelligently migrating to mVoIP, whilst managing the impact on traditional voice revenues will serve both to address the needs of customers and improve positioning against the inevitable OTT onslaught.