Measuring the Effectiveness of the Strategies used by Mobile Operators in Developing Economies, to address the OTT Challenge

ABSTRACT

Thanks to the advances in telecommunications and mobile computing, smartphones have emerged as a vital tool for enhanced communication, connectivity and productivity. With the increased penetration of smartphones and mobile applications, Over-The-Top (OTT) mobile messaging applications now constitute a significant threat to mobile network operators’ SMS-messaging revenues. The literature available today shows that OTT applications like WhatsApp, Viber, Facebook Chat, Skype, etc will cost $54 billion lost in revenue to mobile network operators. As a result, it becomes critical for mobile network operators to put in place effective strategies that will slow the impact of OTT apps.

This research investigates the pro-active measures that mobile operators have taken in developing countries to address this challenge and also measures the effectiveness of these measures in their respective markets.

Data was collected through questionnaires from over 400 pre-paid subscribers in Accra. The findings of the research show that OTT apps are changing the behaviour of smartphone users regarding text messaging. The research revealed that more than half smartphone users send less than 5 SMS messages a day. However, with the introduction of “bundles” by mobile operators in Ghana as a strategy to generate a sustainable average revenue per user seems to be working. Majority of subscribers perceive data bundle as a cheaper and better option than Pay-As-You- Go. However, the introduction of SMS bundle seems not to be an efficient strategy against OTT apps since they are limited to on-net communications only.

1- Introduction

1-1- Background of the study

1.1.1. Introduction

Across industries and across the globe, people have adopted smartphones as an extension of their personal identity, to customize their work environments and make it more flexible (PwC, 2012). Smartphones wrap powerful apps and rich content in a compelling package that enhances connectivity, productivity and especially communications (PwC, 2012). With over one billion smartphones used worldwide in the third quarter of 2012, smartphones sales surpassed the sales figures of older- style phones in early 2013; with India, China and the U.S., being the three largest smartphones markets in the world (Wikipedia, 2013). Smartphones adoption in Africa follows the same trend as developed countries, however, at a slower pace. According to a research conducted by M&C Saatchi (Jon Evans, 2012), on the continent’s mobile growth, the African smartphone market will hit a peak of 40% by 2017 after achieving a 15% high in 2014.

With the very fast proliferation of smartphones worldwide, the number of mobile applications designed for these devices has quickly eclipsed development and sales of PC software (PwC, 2012). According to a forecast made by IDC in 2011 (IDC, 2011), there would be 1.3 million-plus applications for download on smartphones by early 2012. Among these applications, are Mobile Instant Messaging applications, Mobile E-mail applications and Social Networking applications, all of them often called Over-The-Top applications (OTT apps). Some of the most popular are BlackBerry Messenger (BBM), iMessenger, Skype, Viber, WhatsApp and Facebook. Basically, these applications allow users to send and receive texts, images, audio and videos in real-time to/from other individuals or groups of friends. OTT applications require a mobile internet connection to function and both parties must have the application installed on their smartphones. Recent reports highlight that OTT applications have become a key communication media in the daily lives of smartphone users (Nielsen, 2009; Do et al., Tossell et al., 2011). The success of OTT applications is mostly due to their costs: most OTT applications are available for free; and their positive network effect or social influence: the use of an OTT application by a user creates value to another one (and sometimes all users).

This surge in smartphones and OTT applications has resulted in extensive use of the internet. According to the Cisco Visual Networking Index (Cisco Visual Networking Index, 2012), the average smartphone will generate 1.3GB of traffic per month in 2015, a 16-fold increase over the 2010 average of 79MB per month. According to Rysavvy Research, “[Mobile] operators cannot simply double their use of spectrum and double the number of cell sites in their network each successive year. If no changes are made, demand could exceed capacity within three to four years” (Rysavvy Research, 2011). All these factors drive mobile network operators to invest in broadband internet access and transport infrastructures that will support continuous growth in mobile internet traffic. The results of these investments are the shift of mobile networks from 2G to 3G and even 4G networks. According to Statista (Statista, 2014), 3G mobile wireless penetration in Middle East and Africa reached 8% in 2014 and forecasts that it will reach 10% by 2020. Mobile operators expect to recoup their investments and also monetize internet traffic growth through the sales of their services and the usage of innovative pricing models.

1.1.2.Current situation of the Ghanaian mobile telecommunication industry.

There are six mobile operators in Ghana namely: MTN, Glo, Tigo, Vodafone, Airtel and Expresso. These operators not only supply the basic mobile voice services but also offer value-added services such as data and multimedia. The regulation of the sector is assured by the National Communication Authority (NCA). According to the September 2014 telecommunication voice subscription trends released by the NCA (2014), MTN dominates the market with 45.44% market share. Vodafone follows in second position with 23.04% market share. Tigo comes in third position 13.46% market share. Airtel and Glo have 12.71% and 4.95% market shares respectively. Expresso comes in sixth position with 0.40% market share.

Regarding the mobile data market trends, a report released by the NCA (NCA, 2014), shows that MTN is the market leader with over 7,763,273 subscribers. Tigo comes in second position with 2,097,558 subscribers. Vodafone comes in third position with 387,600 subscribers. Airtel comes in fourth position with 86,227 subscribers. Glo comes in fourth position with 36,897subscribers; and finally Expresso with 36,135 subscribers.

1-2- Problem statement

The face of telecommunication has changed significantly over the past few years. Traditional mobile operators that have for a very long time dominated two-way interpersonal conversations, are increasingly being challenged by new market entrants such as Whatsapp, Youtube, Viber, Instagram, Twitter, Facebook Chat, Vine, Skype, etc. and rapidly changing user wants and needs (IBM Global Business Services, 2008). These providers have the potential to become the de facto integrated communication platforms, bringing together social networking, voice communication, e-mail, instant and text messaging as well as content (IBM Global Business Services, 2008). Beyond gaining audience share, these applications pose a great threat and an operational challenge to mobile operators as they “piggyback” on the existing communications infrastructure built at an expensive cost; thus imposing network capacity issues and increased costs for the network providers (IBM Global Business Services, 2008).

A new report from Juniper Research (2014) indicates that voice and messaging traffic continues to lose market share to OTT applications players such as Whatsapp, Facebook, Skype and Viber; and that is expected to cost mobile operators $14 billion in revenues worldwide. In developed economies such as Italy, Spain, and the U.K., mobile operators’ revenue had fallen to less than 60% of their value five years ago.

Faced by the twin problems of decreasing service revenues and rising network costs, mobile operators have developed new strategies, business and revenue models to maximizing new revenue streams and cost reduction. Although the OTT challenge faced by mobile operators worldwide is the same, the markets in which they operate are different. Therefore, strategies must be introduced based on the level of risk inherent in each market.

The goal of this research is thus to investigate and measure the effectiveness of the strategies used by mobile operators in developing economies to reduce the impact of Over-The-Top applications on their revenues and also to measure the effectiveness of these strategies.

1-3- Research questions

a- What drives the use of OTT apps among smartphone users?
b- What benefits do OTT apps provide to smartphone users?
c- What are the challenges faced by mobile operators regarding the use of OTT apps by their subscribers?
d- What are the strategies used by mobile telecommunications operators in developing countries to reduce the impact of OTT applications on their revenue? How effective are these strategies?

1-4- Research objectives

a- To investigate the drivers of OTT apps.
b- To investigate the benefits that OTT apps provide to smartphone users
c- To investigate the challenges that OTT apps presents to mobile telecommunications operators.
d- To investigate the strategies used by mobile telecommunications operators in developing countries to reduce the impact of OTT applications on their revenue and measure their effectiveness.

2- Literature review

2.1- Introduction

2.2- Drivers of OTT apps usage and their benefits to subscribers

The use of OTT apps comes down to a simple basic human desire: the need to connect with other humans and to be part of a group. OTT apps came about at a time when technology and the internet have made it so we can connect with anyone, anywhere and at anytime. When looking at the trends in communication evolution, communication patterns are shifting from personal and conversational, to sharing and collaborative, augmented with links, videos, photos and other multimedia content that substantially enrich the communications experience (IBM Global Business Services, 2008). All this is being enabled by greater global connectivity, the availability of affordable, high-quality content, communication devices such as smartphones, and the rise of mobile applications (IBM Global Business Services, 2008).

Traditional interpersonal communication, usually done via the telephone, allows expression and two-way conversation, but does not provide group or collaborative capabilities (IBM Global Business Services, 2008). As mentioned by Professor Clay Shirky, a leading authority on the social and economic effects of the internet at New York University’s Interactive Telecommunication Program, “The telephone, the technological revolution that put the most expressive power in the hands of individual, didn’t create an audience; telephones were designed for conversation” (Shirky Clay, 2008). John Stankey, President and CEO, AT&T Operations also said that “Communications overall is shifting from ‘point-to-point’, to ‘many-to-many’, in order to socialize and enjoy an experience more deeply - people consuming content together and interacting during that experience from virtually anywhere in the world.” OTT apps can thus be seen as the communication media platforms that enable group communication encompassing many participants through shared spaces in virtually any geographic location (IBM Global Business Services, 2008). OTT apps also help people to develop their identities, meet friends or form relationships that become part of their individual social graphs (IBM Global Business Services, 2008). According to a report released by the Institute for Business Value Analysis in 2008, OTT apps are used instrumentally to reinforce social ties (Institute for Business Value Analysis, 2008).

2.3- Effect of smartphone penetration rate on mobile operators

According to (Kineto, 2013), the scale of the OTT threat in each market varies based on two factors: the level of smartphone penetration; and the prevailing tariffs structure for basic communications services. Smartphones empower subscribers to choose alternate services that compete with mobile operators’ core offerings; and high tariffs for telephony and SMS also provide the reason for them to do so (Kineto, 2013). Markets with fast-growing percentage of smartphone users and with higher tariffs for telephony and messaging are most at risk of short-term erosion of their revenues as subscribers rapidly switch to using third party OTT applications (Kineto, 2013). Conversely, in markets with low smartphone penetration (often due to regulatory blocks on operator-subsidized smartphones) and already low rates for telephony and SMS, OTT applications threat to operators’ revenue is less likely (Kineto, 2013).

In Ghana, the number of smartphones users increased from 525 in December 2011, to 1.7 million in June 2014; which represent 15% of the total population (Dasmani Laary, 2014). It is however expected that smartphones penetration rate will increased in Ghana due to the removal of import duties on smartphones starting in 2015 (Dasmani Laary, 2014). Regarding the tariffs of the services offered my mobile network operators in Ghana, they are for most of them very low. The table below show the tariffs of mobile network operators for voice and SMS services

2.4- Challenges faced by mobile operators regarding the use of OTT apps by their subscribers

With the advent of OTT applications, which are gaining significant audience, attention and market share, subscribers of mobile telecommunication services always looking for better, cheaper and faster products and services have changed their behaviour towards their choice of communication media. Many subscribers now use the voice and messaging services offered by OTT applications, to communicate and exchange with their peers. As a result, mobile operators see a decline in their revenue since the voice and SMS services provided by these latter have ben left aside by their subscribers. The drivers of that shift in behaviour are pretty straightforward.

2.4.1- SMS VS. OTT apps

SMS or Short Messaging Service is a ubiquitous capability built into the GSM wireless standard which allows text messages of 160 ASCII characters, to be sent to and from any GSM mobile handset, regardless of the service providers (Karen Church et al., 2013). SMS has since progressed to include messages containing image, video and sound content (Karen Church et al., 2013). Known as MMS or Multimedia Messaging Service these tend to cost more than simple text messages (Karen Church et al., 2013). In 2010, 6.1 trillion SMSs were sent, which translates into an average of 193000 SMS per second (Wikipedia, 2013). In 2010, SMS has become a gigantic commercial industry, earning $114.6 billion globally (Wikipedia, 2013). However, SMS provided by mobile operators are being challenged by alternative messaging services available on smartphones with data connection (Wikipedia, 2013).

OTT applications on the other hand such as Whatsapp, Viber, BBM, Facebook Chat, etc, allows smartphone users to send and receive image, video, audio and location- based messages to/from individuals or groups of friends at no cost (Karen Church et al., 2013). OTT applications require a mobile internet connection to function and both parties must have the same application on their smartphones in order to communicate or share data with each other (Karen Church et al., 2013). OTT apps also provide additional social information to the users. For instance, users can see when their friends are online, when their friends are typing; and the profile pictures of their friends, etc (Karen Church et al., 2013). OTT apps also keep record of previous conversations, they are not limited in the number of characters, they provide notifications, and users can send a voice message rather than a text message (Karen Church et al., 2013). In a nutshell, OTT applications add more value and convenience to text messaging than SMS does. OTT apps like WhatsApp for instance have over 350 million monthly active subscribers, 400 million photos are shared each day and the messaging system handles more than 10 billion messages each day (The Verge, 2013; The Guardian, 2013). OTT apps like WhatsApp are very often the main reason why subscribers purchase smartphones.

2.5- Impact of OTT applications on smartphone users

The impact of OTT applications on smartphone users has been the topic of many studies. Research to date has spanned various countries including Finland (Kasesniemi E., 2002), Norway (Faulkner X., and Culwin F., 2005), Japan (Ito M., 2005), the UK (Grinter R., et al., 2001), and the US (Grinter R., et al., 2003). While some differences have been found in text messaging habits across users in these countries, all studies have shown that Instant Messaging is generally used primarily among close-knit friends or peers. Factors such as cost, ease of use and social connection have contributed to the increased adoption of OTT apps among smartphone users (Battestini A. et al., 2010). According to a research conducted by Karen Church et al., (2013), while cost significantly impacts people frequency of usage, social influence is one of the main reasons for today’s migration to mobile instant messaging applications. The nature and purpose of OTT applications usage tend to be more social, informal and conversational in nature, while SMS is seen as more privacy preserving, more formal and generally more reliable (Karen Church et al., 2013). They also concluded that neither technology was a substitute of the other.

More recent studies focused on the dynamics of text messaging habits among smartphone users. Do et al. (2011) conducted a study with 77 users over a 9 month period. The results of their study show that OTT apps are the most frequently used application among their smartphone user sample.

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