Disruption Calling

Relentless convergence continues to rattle telecom operators and their once lucrative business models. What can they do to adapt?

By Zeid Nasser

Telecom operators are in a curious position at the moment. They owe their very existence to the same mobile infrastructure and devices that are now sucking away their revenue. It’s a classic case of self-cannibalization. Telcos are selling less and less SMS bundles, but more—and ever larger—3G and 4G bundles. But these are the very same data subscriptions that are allowing users to rely on messaging services that are fast replacing SMS. That means telecom operators are suffering from a net loss. Talk minutes have also been dropping, especially international calling, due to the use of Voice over IP (VoIP) with desktop and mobile apps like Skype.

This is set to drop to a new low with the arrival of voice calling on Facebook Messenger and WhatsApp. When Facebook bought WhatsApp for $19 billion, it demonstrated the company’s future plans to generate revenue from the approximately 500 million users on this service, who are chatting and sharing every day. This acquisition surely spooked telecom operators, and the recent addition of voice calling confirmed their fears.

All this shows we live in an era in which software is beating the network and the hardware it runs on. These voice calling apps join Google’s G-Talk, Microsoft’s Skype, and others like Viber and Tango in an assault on the future revenue of telecom operators. ‘Social calling’ app owners will take the lion’s share of revenues from the VoIP communication shift, also known as the ‘value added revenue.’ Telecom companies, on the other hand, will obtain the ‘minimum fees of transportation.’

Such app-calling services are considered to be part of the Over-The-Top (OTT) type of services which a user receives ‘over the Internet’ and aren’t provided directly by telecom operators or Internet Service Providers (ISP). What this means is that your operator doesn’t benefit from any subscription fees or advertising revenue. Examples of OTT services include all mobile apps you buy from application stores, services like Netflix (IP TV services).

Looking at the losses to telcos due to this phenomenon, research firm Ovum forecast that consumer use of VoIP through OTT will grow at a compounded annual rate of 20 percent between 2012 and 2018, culminating at 1.7 trillion minutes. Accordingly, a calculation of losses shows a whopping total of $380 billion, of which $63 billion will be lost in the final year onwards.

So can standard mobile network calling services maintain some of their paid calling minutes? The answer is yes. To begin with, the fact these apps can only make calls to those you are ‘connected to’ or those who ‘accept to receive your calls’ means that traditional calling will continue to be important, though smaller than before.

You will need to call land lines and office numbers which chat apps can’t handle. Other than using paid mobile-to-land-line VoIP services like Skype, users will probably opt for the less expensive and hassle-free option of opening the number keypad and dialing. Your mobile subscription comes with thousands of minutes which you will use. Perhaps the size of your calling plan will get smaller, but you’ll still need it. So, it’s not all doom and gloom, yet!

For most of us, the aforementioned logic would apply. However, other than the VoIP shift there’s also an ongoing generational shift among users. For teens, the green phone icon is just another app on their screen and WhatsApp is the same. This levels the playing field between ‘telecom voice’ and ‘voice over IP.’

As you would expect, this has got many stakeholders nervous. Some governments and regulatory bodies are planning to intervene to protect their national telecom operators. The idea is to prevent losses to such huge corporations which pay taxes and employ the local workforce. This would be a step backwards, and a move against the freedom of economic forces. Still, OTT Regulation is coming. In countries like China, where the world’s biggest mobile carrier operates with 760 million subscribers, OTT apps are being blamed for the disappointing financial results and there could be some attempts to slow down this trend.

But the majority of governments across the globe will not intervene. That’s why the heyday of big profits from high SMS margins and international calling has ended. At some point in the future, local calls may follow.

Put simply, no regulator or operator can halt the march of technology and consumer choice. Perhaps a more fruitful approach would be to reorganize operations to lessen the blow and find the means to capitalize on the evolution of the telecommunications industry. It’s the only realistic option, as the fast-pace of developments suggests we’ll be seeing more disruption to the telephony in the coming decades, whereby not even the ‘voice chat app’ owners will be safe.