OTT is the future service model for communications and media, as well as for a whole range of other apps like e-commerce, m-commerce, ehealth, e-education, smart grids and the digital economy in general. While the rise of OTT services has created serious concerns for the traditional telecoms operators, it has also created an environment for innovation and alternative services to grow.
The Scope and trends
The public internet that started in the 1980s has grown in scope over the last three decades. In its current form, it has the added ability to carry the entire gamut of services that are required to be delivered to a consumer of telecom services. It allows a telecom subscriber to access almost all the services required for information, education and entertainment. It has enabled an individual’s commercial transactions including retail; in that respect, it has altogether redefined the conventional marketplace. Even personalized services, such as a taxi ride can be accessed on a person’s fingertips. This growth has also brought about a fundamental shift in other spheres including telecom and TV.
Earlier, networks used to be built around specific applications, say voice, internet or Pay TV. Voice, message and video content have now been reduced to mere bytes.
Telecom service providers (TSPs) offering fixed and mobile telephony are currently being overwhelmed by online content, known as over-the-top (OTT) applications and services. The term over-the-top (OTT) refers to applications and services which are accessible over the internet and ride on operators’ networks offering internet access services e.g. social networks, search engines, amateur video aggregation sites etc. The best known examples of OTT are Skype, Viber, WhatsApp, Chat On, Snapchat, Instagram, Kik, Google Talk, Hike, Line, WeChat, Tango, ecommerce sites (Amazon, Flipkart etc.),Ola, Facebook messenger, Black Berry Messenger, iMessage, online video games and movies (Netflix, Pandora). Today, users can directly access these applications online from any place, at any time, using a variety of internet connected consumer devices. It is becoming increasingly difficult for consumers to know if there is an economic difference in connecting various networks via a land phone, cell phone, or a computer. In fact, young users find it difficult to distinguish among these three networks; from their perspective, all that matters is connectivity. They visualize these not as a layered and interconnected series of discreet networks, but as an organic whole.
Carriage is separated from content in internet networks, enabling OTT content and application service providers to deal directly with end users. TSPs are excluded from the said transactions, with no control over the content or the application. The move to Long Term Evolution (LTE) technology’s all-IP architecture will further facilitate this delinking of delivery of services from the underlying network.
The characteristics of OTT services are such that TSPs realise revenues solely from the increased data usage of the internet-connected customers for various applications (henceforth, apps). The TSPs do not realise any other revenues, be it for carriage or bandwidth. They are also not involved in planning, selling, or enabling OTT apps. On the other hand, OTT providers make use of the TSPs’ infrastructure to reach their customers and offer products/services that not only make money for them but also compete with the traditional services offered by TSPs. Leave aside TSPs, these apps also compete with brick and mortar rivals e.g. e-commerce sites, banking etc.
An OTT provider can be defined as a service provider offering ICT (Information Communication Technology) services, but neither operates a network nor leases network capacity from a network operator. Instead, OTT providers rely on the global internet and access network speeds (ranging from 256 Kilobits for messaging to speeds in the range of
Megabits (0.5 to 3) for video streaming) to reach the user, hence going “over-the-top” of a telecom service provider’s (TSP’s)network. Services provided under the OTT umbrella typically relate to media and communications and are, generally, free or lower in cost as compared to traditional methods of delivery.
The arrival of smartphones with multimedia and advanced communication functions has revolutionized the OTT services market. The greater processing power, easy customisable interface and support of high data rate connectivity make innovation and adoption of OTT apps easier. The link between the penetration of smartphones and growth of OTT services marks an inflection point in the complex strategic relationship between TSPs and OTT providers. This is because it determines market prices, rewards and incentivises investment for the OTT players and the TSPs.
Another reason for the growth of OTT services and their independence from the TSPs is because of the rapid computerisation of the banking system and the growth in the number of internet banking transactions. Earlier, if a consumer bought an app/ content, the TSPs did the billing and the content provider had to depend on the TSP for its revenue share from the amount collected by the TSP. However, with the availability of
internet banking, the content/ app provider can independently bill the consumer and get the money directly.
The traditional income model of the operators, based on subscriptions and metered services, mainly voice and messaging, is showing signs of running its course. At the same time, growing OTT communication services use the TSPs’ networks and compete with the very same TSPs’ own proprietary services. Without a doubt, the increased use of OTT applications increases the growth of data usage and, thereby, increases the flow of revenue to TSPs. However, companies emerging as part of the new industry (like Google and Yahoo) take advantage of advancement in network technologies to expand their reach and diversify through new opportunities that earn them ever-growing new income inflows. In many cases, they base their sales primarily on advertising and offer services
free or at rates far cheaper than traditional models.
Based on the kind of service they provide, there are basically three types of OTT apps:
(i) Messaging and voice services, (Communication services);
(ii) Application eco-systems (mainly non-real time), linked to
social networks, e-commerce; and
(iii) Video / audio content.
OTTs can impact revenue of all the three real time application verticals – video, voice and messaging. The various other non-real time applications include e-payments, e-banking, entertainment apps, mobile location based services and digital advertising.
The other major driver of OTT application services are Cloud Services. The general idea of the ‘Cloud’ is to store content on a server that can be reached through the internet so that the content can be accessed from any device anywhere, as against leaving it on a hard drive. Apple, Google, Amazon, Microsoft and Dropbox offer various kinds of Cloud services.
With the emergence of Cloud Services, users are now able to upload all their data on the Cloud at a central location which is then accessed frequently using any device. This ‘service portability’ feature between devices allows a user to upload any data, say a photo to the Cloud, which can then be viewed from anywhere, on any device. These services also place huge demands (pressure) on the network due to downloading of large amounts of data. Syncing one’s data5 with the Cloud every time an application is used consumes much more bandwidth than the traditional back-up or selective uploading and downloading technologies.
Over-The-Top(OTT) is the service model not only for future communications and media services, but also for emerging services, such as e-commerce, m-commerce, e-health, e-education, smart grids and the digital economy in general.
Mobile commerce is also one of the sunrise sectors today and the industry is finally coming into its own due to the rise in OTT services and app stores offering more digital channels for e-retailers to reach varied audiences. The growth of smartphones, along with improvements in mobile infrastructure, has also assisted the growth of m-commerce in many parts of the world. What is more, the cost of regulatory compliance is comparatively less when compared to the existing models. New players are entering the mobile commerce market because of the huge revenue opportunities. It also has the potential for enduring customer acquisition. The development of m-wallets and m-payment systems is seen as a key development for the m-commerce sector and beyond.
Omni-channel retailing is another emerging trend. New communication and software developments are making it increasingly possible for retailers to offer a seamless shopping experience using the available retail channels such as mobile internet devices, computers, bricks-andmortar, television, radio, direct mail, catalogues and so on. As in many other markets, well-functioning omni-channel systems can easily operate internationally, so national boundaries are becoming less of a barrier for those who want to explore overseas markets. There are several taxation laws (and consequential obligations) for doing business within national boundaries; these tend to get blurred when business is conducted internationally through the web.
In India, data usage has increased from 49645 TB in Oct 2013 to 90267 TB in December 2014, showing a cumulative annual growth of 65.2%. The data revenue has nearly doubled, from Rs. 3057.83 Crores in June 2013 to Rs. 5910.28 Crores in September 2014. It is estimated that data revenue as a percentage of overall mobile revenue21 will reach 32% by 2015 as compared to 14% in 2010.
Indian Telecom Licensing Regime
Under the current telecom licensing regime, voice and messaging services can be offered only after obtaining a license. Apart from traditional voice and messaging, IP based voice and messaging services can also be offered by TSPs as unrestricted Internet Telephony Services, which are permitted under the scope of the Unified Access Service (UAS) license in terms of the UAS Guidelines dated 14th December 2005. Similar provisions exist for Cellular Mobile Telephone Service (CMTS) and Basic Service Licences. However, the scope of the Internet Services Licence was restricted to Internet Telephony Services without connectivity to Public Switch Telephone Network (PSTN) / Public Land Mobile Network (PLMN) in India.
According to the Cellular Operators Association of India (COAI), voice services provided by OTT players substitute the PSTN/ Internet Telephony Services offered by licensed TSPs. In the present licensing regime, Internet Telephony is a licensed service permitted only under the UAS/ISP or Unified License granted under Section 4 of the Indian Telegraph Act 1885. Hence, according to COAI, companies offering OTT voice services, without holding a telecom license in India, circumvent Indian telecom licensing provisions and provide services that are otherwise permitted only under a telecom license.
COAI further opines that the licensed TSPs in India are subject to many licensing provisions, including but not limited to regulatory fees such as Entry Fee, License Fee and Spectrum Usage Charges. They are also subjected to various statutory regulations such as Quality of Service Regulations, Tariff Regulations and, Consumer Protection Regulations. They also need to ensure emergency services, confidentiality of customer information, privacy of communication, undergo regular audits and ensure proper lawful monitoring and interception. However, ‘unlicensed’ OTT providers are not bound by any such conditions. This opportunity for arbitrage enables OTT players to offer Internet Telephony either free or at very low tariffs and that too by riding on the TSPs’ networks. Such OTTs can and will unfairly garner a substantial chunk of voice service usage, as they have done in the case of messages, because they directly compete with voice services provided by TSPs. And, the OTT business model, with low or zero tariffs, results in usage shifting from PSTN/Internet Telephony Voice to OTT Voice (Internet Telephony). As a result, both licensed operators and the Government are deprived of their legitimate revenues.
The TSPs also argue that allowing the use of VoIP/Internet Telephony on such a massive scale, without a licensing regime, would result in a significant disruption to the existing business of TSPs and could substantially derail their investment capability. Such a situation would jeopardize the national objective of affordable and ubiquitous telephone
and broadband access across the country. Further, the proliferation of OTT communication services would lead to a significant loss of revenue for the exchequer.
On the other hand, OTT players offering communication services argue that such services (voice call, chat, messaging) are offered to users through the internet services provided by Licensed Telecom Operators and the TSPs levy applicable usage charges. Therefore, OTT providers argue that they are offering communication services over the internet but the TSP is paid for the internet services consumed by an end-user.
The OTTs are quick to point out that increased data usage augments revenue flows of the TSPs. This is indeed true. However, whether this revenue sufficiently compensates the TSPs needs further examination.
Further, there is a technological caveat to the general proposition that increased OTT app usage augments revenue flows of TSPs. With the evolution of new coding techniques (I2S for audio and HVEC for video) apps are being designed to consume minimal bandwidth and improved call/ video quality. If so, will there be any revenue increase and would it
still sufficiently compensate the TSPs?
Business Models of OTT players
Hundreds of thousands of OTT apps have emerged due to the low cost base required to provide a service in the internet environment. For example, WhatsApp Messenger can run at an operating cost of a meagre ten cents per subscriber per year. The business becomes viable even with a nominal charge of less than a dollar per year. But the WhatsApp service is presently free in India, largely due to the low credit card penetration.
The business models of most OTT apps are predominantly advertisement driven. Worldwide, their net digital advertisement revenues increased from $ 121.47 billion in 2013 to $ 146.42 billion in 2014. In India the digital advertisement revenue grew from 28.3 billion in 2013 to 41.2 billion in 2014. But new models like in-app purchases of selling virtual goods like stickers, mobile games, apps are rising exponentially. For example29, 85% of the $1.1 billion revenue of WeChat in 2014 was from online gaming, and the rest was from stickers, services like sponsored accounts, and from m-commerce. Today, merchants are selling goods as diverse as fruits, smartphones, movie tickets, taxi rides and insurance using WeChat. Similarly, Line’s gaming revenue accounted for 60% of its $338 million revenue in 2013, while sticker purchases accounted for 20% and the rest were from business services like official accounts and branded stickers. In India also, because of the growing popularity of smartphones, mobile gaming revenue30 is expected to jump to 18,000 crore by 2017 from barely 5,700 crore in 2013.
Impact of OTT
Rapid growth in the telecom sector will continue and, possibly, accelerate in the future. According to Ericsson, globally the number of smartphone subscriptions is expected to exceed 4 billion by 2018, while mobile broadband subscriptions are projected to reach 7 billion in 201831. The growth of the smartphone market has fuelled the surge in OTT services. An analyst, Pyramid Research, projects that 4G subscriptions will grow tenfold over five years, from 88 million in 2012 to 864 million in 201732.
The future of OTT services and their impact will hinge on:
a) Growth in penetration of Smartphones (and other smart devices)
b) Growth in overall revenues driven by new technologies.
c) Growth of IP traffic
d) Growth of bandwidth consumption
Annual global IP traffic is expected to surpass the zettabyte threshold (1.4 zettabytes) by the end of 2017, driven by the diversification of payTV and video streaming services, and other media-rich content.The annual global mobile data traffic is expected to increase by 873% from 30 Exabytes in 2014 to 292 Exabytes by 201941. More than 4 billion hours of videos are watched on YouTube each month, 30 billion pieces of content are shared on Facebook every month, and some 400 million tweets per day are sent by about 200 million monthly active users.
In India, Internet traffic is expected to grow more than 5 fold from 2013 to 2018, with a compounded annual growth rate (CAGR) of approximately 40 per cent. The total IP traffic was 538 Petabytes (PB) in 2013 and is expected to reach 2246 PB in 2017. The traffic will reach an annual run rate of 13.7 Exabytes by 2019, up from 1.1 Exabytes in 2014. The report also reveals in 2014, the mobile data traffic generated by both 2G and 3G mobile broadband services increased by 74 per cent, primarily driven by strong 3G growth of 114 per cent.
The technological differences between OTTs and TSPs have led to a situation where both TSPs and OTT service providers become capable of providing similar services to customers. The communication OTT players are actually competing with traditional TSPs. The TSPs bear the costs for the infrastructure, spectrum management and also pay license fees for use of spectrum. At the same time, they need to meet Universal Services Obligations and roll-out obligations and comply with other regulations. The counterpart OTT service providers, however, are not obliged to adhere to any regulatory obligations and do not have to bear any such costs. The TSPs fall under a regulatory regime whilst OTT players are simply bypassing such a regime.
Apart from communication services, there are other areas where OTTs are, in effect, bypassing local regulations e.g. taxi regulation for Uber is a case in point. While companies providing various applications-based services such as Uber Taxi, Ola taxi, e-commerce apps, etc. are an easy solution for customers, there can be attendant risks. For example in the case of conventional (non-OTT) taxi services, the regulatory framework
has a licensing regime for taxis in India- local (the black and yellow) taxis, radio taxis and tourist permit taxis. But, OTT apps for taxi services entirely bypass this licensing regime. Acting as a platform, these taxi services connect private taxi players directly with users. This may be beneficial to both users and taxi owners; but, it could also pose certain unanticipated risks. The major challenge remains: in a non-level playing field, how can such OTT app providers be brought within the ambit of the prevailing regulatory regime of the country to ensure public safety and security of users.
As per TSPs, the OTT players are thus able to circumvent the regulatory requirements associated with businesses in the brick and mortar world. They also additionally save on regulatory costs and on costs for regulatory compliance. This regulatory imbalance or arbitrage opportunity allows them to offer services or goods that are cheaper or free or at competitive rates when compared to the existing model.
The Federal Communications Commission’s Open Internet Order, 2010 is a set of regulations for ensuring net neutrality in USA. It also differentiates the implementation of net neutrality for fixed line providers and wireless net providers. The rules take a rigorous net neutrality stand towards fixed line broadband providers but are lenient towards the wireless net providers. However, net neutrality towards all legal content is assured for both the service providers.
To sum up, national policy issues arising from the rapid growth of OTT services need to be addressed. The various regulatory imbalances need examination at different levels and by different agencies of Government, at the Central and State level. The security issues (including law and order dimensions) that have surfaced because of the growing popularity of the OTT services need to be addressed. Public safety and privacy issues can no longer be left unattended. Lastly, whether the growth of OTT actually impacts the economy (positively or negatively) in the shortterm or will consolidate and facilitate the growth of economy in the longterm needs careful examination.
Based on Consultation Paper On Regulatory Framework for Over-the-top (OTT) services – Telecom regulatory authority India 2015