Quantifying The Impact of OTT Communications Services in Western Europe

Quantifying the impact of OTT communications services in Western Europe
Webinar
Quantifying the impact of OTT communications
services in Western Europe

January 2013 Stephen Sale
Analysys Mason Limited 2013
Forecast introduction
Mobile voice Messaging Market summary and implications
What we forecast
Fixed voice Traditional operator services Next-generation operator services Non-operator provided services CS voice
Mobile voice CS voice
Messaging SMS
VoBB
VoIP/VoLTE
IP messaging
OTT VoIP
OTT VoIP
OTT IP messaging
Focus for today
We provide forecasts for 16 individual markets

Countries covered individually for this report [Source: Analysys Mason, 2012]
Detailed splits are provided for the following countries: Austria Belgium Denmark Finland France Germany Greece Ireland Italy Netherlands Norway Portugal Spain
Sweden
Switzerland UK.
The Western Europe dataset is the aggregation of the above.
Note on methodology
Telecoms Market Matrix Smartphone usage monitoring Connected Consumer 2013
Market sizing
Service penetration across devices Traffic/usage levels Pricing/revenue trends
Forecast
Attention to local conditions and dynamics Model relationship between price/usage/revenue View on business models and enabling technology
Forecast introduction Mobile voice Messaging Market summary and implications
The mobile voice market is entering a new phase

Revenue is in decline across Western Europe There are strong indications that mobile voice usage has peaked in some countries This is a result of several factors, including: voice services are mature economic downturn renewed appeal of the fixed line alternative means of communication available on smartphones are substituting usage. The mobile voice market is entering a new phase
Average mobile voice usage in Western European countries, 1Q 20042Q 2012 [Source: Analysys Mason, 2012] 250 AT BE DK 200 FI FR DE GR 150 IE IT NL 100 NO PT ES SE 50 CH UK WE 0
Minutes per month
1Q 2004 4Q 2004 3Q 2005 2Q 2006 1Q 2007 4Q 2007 3Q 2008 2Q 2009 1Q 2010 4Q 2010 3Q 2011 2Q 2012
Call substitution to VoIP services is undoubtedly occurring

Preliminary results from our Connected Consumer Survey 2013 suggest that penetration of VoIP services on smartphones is in the region of 10%. Skype continues to dominate the VoIP market, which attests to the power of the network effect.
Penetration of VoIP services among smartphone users, by country, October 2012 [Source: Analysys Mason, 2012]
Percentage of smartphone users
14% 12% 10% 8%
6%
4% 2% 0% France Germany Spain UK
Windows Messenger was the second-most popular platform. Viber and Google Talk are the major alternatives.
Some smartphone users are beginning to use VoIP apps as their primary voice service and the danger for operators is that they become relegated to providing secondary voice services for a growing group of users.
Top-4 VoIP services among VoIP users, by country, October 2012 [Source: Analysys Mason, 2012]
France 1 2
Skype (92%) Windows Messenger (42%) Google Talk (11%)
Germany
Spain
Skype (83%) Viber (29%)
UK
Windows Messenger (28%)
Viber (11%)
iChat (9%)
Google Talk (19%)
Viber (21%)
OTT VoIP services will continue their growth across devices

Percentage of smartphones Devices (million)
We expect OTT VoIP applications to continue to attract new smartphone users. By 2017, almost a third of smartphone owners will be active (if occasional) users of mobile VoIP applications, but take-up will vary significantly from country to country. Usage of VoIP services will spread across devices: VoIP usage is increasing on tablets. Migration from the desktop PC to the more portable laptop Users by device is not equivalent to subscribers; there is double-counting. The development of new features will also drive the growth of OTT VoIP services.
Smartphone penetration of OTT VoIP applications in Western Europe, 20092017 [Source: Analysys Mason, 2012]
35% 30% 25% 20%
15%
10% 5% 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017
Usage of OTT VoIP applications by device in Western Europe, 20092017 [Source: Analysys Mason, 2012]
250 200 150
Smartphones
Tablets
100 50
0
PCs and laptops
2016
2009
2010
2011
2012
2013
2014
2015
2017
10
Operators are tweaking the voice feature set but most view any major transformations with VoLTE as a long-term plan
Several mobile operators have launched their own VoIP apps, typically offering low-cost or free calling via Wi-Fi. Operators have also improved voice quality with AMR-WB now widely available in Western Europe. This has had little impact on consumer perception thus far.
Smartphones by default voice service, Western Europe, 2009 2017 [ Source: Analysys Mason, 2012] 400
350 300
Smartphones (million)
250 200 150 100 50 0
VoLTE offers an opportunity to improve the mobile voice feature set

VoLTE plans are currently being decided by spectrum strategies. Most operators do not have a meaningful voice strategy. European operators are viewing VoLTE as a long-term migration rather than urgent requirement. We do not expect widespread deployment in Western Europe until 2015.
2009
2014
2010
2011
2012
2013
2015
2016
Circuit-switched voice
VoLTE
2017
11
Operators will remain the dominant force in mobile voice but will be significantly weakened
Voice traffic originated on smartphones in Western Europe, 20092017 [Source: Analysys Mason, 2012]
800 700 600
A growing proportion of smartphone owners will use VoIP as their primary voice service. However, the impact will be restricted to (sizeable) niches. Full service substitution will be very limited. Price will remain the major driver in the voice market. Tariff rebalancing means that operator-provided voice will continue to get cheaper. We expect the market to fragment as existing IP-based communication platforms improve their voice capabilities and best-of-breed apps emerge. Each will appeal to significant market segments.
Minutes (billion)
500
400 300 200 100
2014
2016
2009
2010
2011
2012
2013
2015
2017
Circuit-switched voice
OTT IP voice
Operator IP voice
By 2017, we forecast that non-operatorprovided VoIP services will generate 14% of smartphone users voice traffic.
12
Voice revenue will continue its steep decline

We are forecasting a sharp decline in mobile voice revenue. Decline in MNO-billed voice usage (particularly among smartphone users) VoLTE will offer more room for price competition in mobile voice and act as a further impetus for tariff rebalancing. Pressure on voice revenue will be compounded by regulatory moves to reduce mobile termination rates (MTRs). Prepaid ARPU will decline faster than contract.
Mobile voice revenue, Western Europe, 20092017 [Source: Analysys Mason, 2012] 120
Revenue (EUR billion)
100
80
60
40
20
2015
2009
2010
2011
2012
2013
2014
2016
Retail revenue
Termination
2017
13
14
Revenue trends in the SMS market are worsening but the true extent is obscured
SMS retail revenue growth in selected Western European countries, 1Q 20082Q 2012 [Source: Analysys Mason, 2012]
At an aggregated regional level, the SMS market in Western Europe is in decline However, it remains in good health in many countries, at least at first glance.
40%
30%
BE
Year-on-year revenue growth
20% 10% 0%
DK FR DE IT NL NO ES SE UK WE
A clear picture of revenue trends is increasingly difficult to achieve given the reliance on (often arbitrary) accounting methods. Much depends on the signals that individual operators want to give to both its customer base and to its shareholders. Pricing for standard prepaid usage and overage charges for contract users is much more transparent.
10%
20% 30% 40%
1Q 2008
3Q 2008
3Q 2009
1Q 2010
1Q 2011
3Q 2011
1Q 2009
3Q 2010
1Q 2012
15
A clearer view is available when measuring SMS usage, which is faltering in some countries but not in others
The SMS market in Western Europe is showing marked divergence in usage trends. There are three major groupings. Poor performers (e.g. Spain) Late bloomers (e.g. France, Belgium)
SMS sent per month
Average SMS usage, by country, 1Q 20042Q 2012 [Source: Analysys Mason, 2012] 300
250
Early blazers (the Nordics) The different market contexts for SMS usage is a major determining factor for: the impact of alternative services such as WhatsApp Messenger the response of mobile operators to the threat of substitution.
200
150
100
50
AT BE DK FI FR DE GR IE IT NL NO PT ES SE CH UK
1Q 2004 4Q 2004 3Q 2005 2Q 2006 1Q 2007 4Q 2007 3Q 2008 2Q 2009 1Q 2010 4Q 2010 3Q 2011 2Q 2012
16
Alternative messaging services have gained most ground in countries where the SMS market is weakest
A large and growing proportion of smartphone users are adopting alternative messaging services. The main ones are: cross-platform messaging applications such as WhatsApp Messenger platform-specific services.
Penetration of alternative messaging services among smartphone users, by country, October 2012
70% 60%
Percentage of smartphone users
50% 40%
30%
20% 10% 0% France Germany Spain UK
The greatest impact has been in countries where the SMS market is weak. According to our latest survey data, 63% of smartphone owners in Spain used alternatives..
The pricing of these services is clearly attractive in comparison with operatorprovided SMS. Cross-platform services are the most popular in the countries that we surveyed.
Top-4 alternative messaging services among users of these services, by country, October 2012
France
1 Skype (36%)
Germany
WhatsApp Messenger (76%) Facebook (49%) Skype (43%)
Spain
WhatsApp Messenger (87%) Facebook (31%) Skype (30%)
UK
Skype (52%)
2 3
Facebook (34%) WhatsApp Messenger (14%) Google Talk (14%)
Facebook (43%) WhatsApp Messenger (39%) BlackBerry Messenger (23%)
ICQ (17%)
Google Talk (15%)
17
Operators are responding by offering IP-based messaging services and are adopting three main approaches
RCS/joyn
RCS/joyn is the industrys official response. It is specified by the GSMA.
Telco OTT
Telco OTT services are proprietary services offered by operators following an over-the-top model. Feature sets vary. Services are either developed inhouse (often with the help of a specialist vendor), or offered using a white-label service. They may or may not utilise the IMS core. Many operators are using telco OTT to address specific market niches that are seen as vulnerable to substitution. The service is typically offered separately from the core operator proposition. Some of the major players are experimenting with both RCS/joyn and telco OTT approaches. European examples include Oranges Libon and Telefnicas TU Me/TU Go.
Partnerships
While not widespread in Western Europe, some operators are forming partnerships with providers of alternative messaging services. WhatsApp has entered into agreements with a number of operators The standard approach is to zero rate traffic associated with specific applications in some bundles. Roaming packages are also on offer. The brand strength of the partner is chiefly used to support the operators data proposition rather than bolster the existing messaging service. The partnership approach particularly appeals to smaller, disruptive players with less exposure in legacy voice and messaging revenue.
The feature set comprises:

Messaging and group chat Address book integration and capability discovery In-session file sharing, including video RCS/joyn is intended to be offered as a native capability on handsets, but is also offered as a downloadable app. The service is typically rolled out as a coordinated operator response (e.g. service launches in Germany and Spain) with interoperability as a marketable feature. This approach is gaining currency in markets where SMS is under strong pressure and the argument for selfcannibalisation is easier to make.
18
The outlook for the messaging market varies according to four main groups of countries
Characteristics Grouping 1 Historically low SMS usage. Very exposed to substitution. Data-centric mobile markets. Weakening SMS usage. Outlook for OTT alternatives Push for substitution as smartphone penetration increases. Potential to wrest large share of communications market from operators. Likely actions from operators Belated attempts to rebalance tariffs. Co-ordinated RCS launches. Emphasis on innovation. Some telco OTT and RCS. Potential partnerships to differentiate in mobile data. Short-term experiments with telco OTT to address niches. Longer term portfolio protection with RCS. Mainly tariff adjustments to minimise arbitrage opportunities. Examples Germany Netherlands Spain Switzerland Austria Denmark Finland Norway Sweden
Grouping 2
Grouping 3
Strong growth in data. Buoyant SMS market.
Potential partnerships with disruptive operators.
Belgium France Ireland UK
Grouping 4
Weak data market. Buoyant SMS market.
Success targeting niche opportunities.
Greece Portugal
19
Growth of OTT services will fast outstrip operator-provided IP-based services

Percentage of smartphones
OTT messaging services will continue to grow strongly from 2012 to 2017. We expect service penetration of smartphones to increase to nearly 60% by 2017. Price is a major driver in the market, but will diminish in importance. A key decider in outcomes is the battle for the address book. Specialists such as WhatsApp have demonstrated demand for a low-cost crossplatform service with a strong user experience. This is the principal target of RCS initiatives. Messaging services are more vulnerable to substitution than voice.
Smartphone users of IP messaging services in Western Europe by type of service, 20092017 [Source: Analysys Mason, 2012]
70% 60% 50%
40%
30% 20% Operator OTT
10%
0%
2015
Messaging volumes on smartphones in Western Europe by type of service, 20092017 [Source: Analysys Mason, 2012]
1400
Messages (billion)
1200 1000
800
600 400
2017
OTT
Operator IP
2009
2010
2011
2012
2013
2014
2016
SMS
200
0
2013
2009
2010
2011
2012
2014
2015
2016
2017
20
SMS revenue will ultimately decline as markets mature and alternative messaging services gain importance
Messaging retail revenue peaked in 2011, and will fall rapidly in most countries thereafter because: the prevalence of large, flat-rate bundles the increasing popularity of IP-based services
EUR (billion)
20
Messaging revenue by type and its share of total mobile revenue, Western Europe, 20092017 [Source: Analysys Mason, 2012]
25
18% 16% 14% 12%
We are usually reluctant to forecast inflection points around the base year, in this case 2011. In the case of messaging services, we believe that this is well-founded.
Traffic substitution will be faster than revenue substitution. Overall, we expect messaging revenue to decline by 39% between 2011 and 2017.
15
10% 8% 6%
10
4%
2%
0 0%
2012
2009
2010
2011
2013
2014
2015
2016
Retail revenue Share of revenue

Interconnect
2017
Percentage of mobile revenue
21
22
It is likely that the marketing (and accounting) of mobile services will be very different in 2017
Handset ASPU by revenue source, Western Europe, 2011 and 2017 [Source: Analysys Mason, 2012]
20
18
Handset ASPU (EUR per month)
16 14 12 Data
We depend upon operator reporting for revenue splits between voice, messaging and data. Current reporting methodologies are flawed. We continue to forecast each individual service while recognising the implications of a changing revenue mix.
10
8 6 4
Messaging Voice
Tariff rebalancing (in favour of mobile data) will have implications for how services are marketed.
The service elements that operators use to demarcate value to users will change during the forecast period. Overall handset spend will depend on operators ability to segment the market and manage the perceived value of the elements that are within their control.
2
0
2011
2017
23
Operators have a better chance of protecting primary voice services than messaging services
The flat, value-based, pricing model is becoming dominant in all areas of retail telecoms services. Messaging services are in a weaker position than voice. Accordingly, we believe that operatorprovided messaging services will be largely subsumed into data plans, whereas voice services will continue to be offered as default options in mobile bundles. Faced with a choice between a EUR15 dataonly plan with DIY voice and a EUR20 data plus (truly) unlimited voice plan, we believe most customers would opt for the latter.
Characteristics of voice and messaging services [Source: Analysys Mason, 2012]
Voice Strength of onnet versus offnet Requires broad addressability Messaging Relatively recent medium with greater concentration of usage.
Barriers to entry Differentiation
Relatively high.
Relatively low.
Operators control many of the means for differentiation. Unlikely for most users. Less well established.
Easier for new players to differentiate. Feasible for many. Text-based format offers strong fit. Good fit across devices.
Full service substitution Fit with web business models Multi-device
Acoustic capabilities are required; limited by ergonomics.
24
Summary
Mobile voice revenue will continue its steep decline. Operators will remain the dominant force in mobile voice but will be significantly weakened
Operators are tweaking the voice feature set but most view any major transformations with VoLTE as a long-term plan
By 2017, we forecast that non-operator-provided VoIP services will generate 14% of smartphone users voice traffic. Its the end of an era for SMS as IP-based messaging goes from strength to strength. SMS retail revenue peaked in 2011 and will fall rapidly in most countries thereafter Traffic substitution will be faster than revenue substitution
Overall, we expect messaging revenue to decline by 39% between 2011 and 2017.
Messaging services are in a weaker position than voice.
25
Contact details
Stephen Sale
Principal Analyst Stephen.Sale@analysysmason.com
Boston Tel: +1 202 331 3080 Fax: +1 202 331 3083 boston@analysysmason.com Cambridge Tel: +44 (0)845 600 5244 Fax: +44 (0)1223 460866 cambridge@analysysmason.com Dubai Tel: +971 (0)4 446 7473 Fax: +971 (0)4 446 9827 dubai@analysysmason.com Dublin Tel: +353 (0)1 602 4755 Fax: +353 (0)1 602 4777 dublin@analysysmason.com Edinburgh Tel: +44 (0)845 600 5244 Fax: +44 (0)131 443 9944 edinburgh@analysysmason.com London Tel: +44 (0)845 600 5244 Fax: +44 (0)20 7395 9001 london@analysysmason.com
Madrid Tel: +34 91 399 5016 Fax: +34 91 451 8071 madrid@analysysmason.com Manchester Tel: +44 (0)845 600 5244 Fax: +44 (0)161 877 7810 manchester@analysysmason.com Milan Tel: +39 02 76 31 88 34 Fax: +39 02 36 50 45 50 milan@analysysmason.com New Delhi Tel: +91 11 4700 3100 Fax: +91 11 4700 3102 newdelhi@analysysmason.com Paris Tel: +33 (0)1 72 71 96 96 Fax: +33 (0)1 72 71 96 97 paris@analysysmason.com Singapore Tel: +65 6493 6038 Fax: +65 6720 6038 singapore@analysysmason.com

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