Monday, January 28, 2013

Will VoLTE be too late to save Mobile Operator voice?

 2012 will likely go down as the year where VoIP apps reached critical mass in mobile networks.   The roll-out of LTE networks in the US and key cities in Asia, along with the near ubiquity of Wi-Fi have been a key enabler.  Smartphone apps such as Viber, Fring, Line2 and established fixed line alternatives including Skype and Vonage are slowly migrating voice minutes from mobile operator’s traditional services to VoIP.   Perhaps most notable of all is Viber, who between May and June of 2012 added 20 million users to their subscriber pool, ending the year at 140 million subscribers.  Their subscribers are not the silent type either - collectively they sent each other two billion texts and rack-up 1.5 billion minutes of talk time per month.

This trend has surely not gone unnoticed in Mobile Operator HQs.  According to Yankee Group, global mobile voice and messaging revenue are set to decline by $1B per month through 2013 and operators have been thinking through strategies to mitigate this loss.    The answer, at least for Verizon and AT&T has been to charge more for data and device connectivity, bundling unlimited voice and text. This may seem crazy given how much revenue is generated directly from voice today but clearly demonstrates the threat that OTT players represent when operators don’t bundle services.      The genius here is that it disincentivizes the use of over-the-top VoIP applications and creates a puzzle for competitors such as Sprint and T-Mobile who, to-date have benefited from their all-you-can-eat data plans, growing their average-revenue-per-user (ARPU)  in the process.

South Korean mobile operators have seen firsthand the impact of all-you-can-eat data tied with fixed minute calling plans.   Back in April 2011, a local company, KAKAO launched a messaging app called KakaoTalk – a homegrown Korean version of the popular SMS alternative WhatsApp.  Last year, 38 million local subscribers were happily texting each other for free (the population of South Korea is close to 50 million people).  In June of 2012 KAKAO enhanced their offering to deliver a full-blown voice service between their subscribers – for free.   The outcome was extraordinary.  Taking advantage of the cheap, unlimited data plans of the local operators, within three days of service launch, subscribers were generating 20 million calls per day. 
Seeing a massive spike in data volume and a precipitous drop in voice revenue, the South Korean mobile operators moved to action within days and began throttling and then blocking VoIP traffic over their network, obtaining the blessing of the Korean Communications Commission to block or charge more for VoIP services.   It will be fascinating to see if KAKAO and others move to hide or tunnel VoIP traffic through encryption, VPNs and port shifting, creating a cat-and-mouse game between network operator and application vendor.

Perhaps not surprisingly, Korean operators are not the only ones with a block-and-tackle approach.   Vodafone has also moved to block VoIP traffic to subscribers who aren’t on their higher-rate post-pay plans and we can expect other operators to take the same approach, where regulation permits.

With large volumes of over-the-top voice traffic now running across mobile networks and with the fixed-line world as a case-study, the long-term outcome of Telco voice is certainly unclear.  What is certain is that Operators will take advantage of LTE technologies to offer superior voice and video services of their own.    The question then, is can they deploy these services fast enough, (before users migrate to the app world) and will consumers really care?     

It must be said there is a natural protection mechanism available for most mobile operators which slows-down migration, and creates a challenge for any VoIP start-up – it is called The Community-of-Interest Problem.    Your cell phone can reach anybody else on the planet with a phone – Viber, at least today – cannot – that is, not without having you pay to reach the legacy telephone world per call or in pre-purchased minutes.   The reason KAKAO in Korea could be successful so quickly was that they already had most of the population of Korea on their texting service.    In the US, perhaps only Apple (with FaceTime) has this community-of-interest leverage.  On this note, it is also important to understand the role of the handset manufacturer in this equation.    When you consider voice as just another app on the smartphone, the voice app that ships with the device is the one that is going to be used by the majority of consumers.   If it works, is free (or included in the tariff plan), allows consumers to communicate with their friends and family, has fall-back to legacy technology and allows you to reach emergency services, then inertia dictates that these consumers won’t look further afield.

What is fascinating then is that for Mobile Operators, the driver for VoLTE adoption is not to compete with the OTT players per se.  Rather, the move to VoIP services frees up valuable spectrum currently dedicated to voice in the 2G and 3G bands.    This spectrum can then be assigned to data services to feed consumer’s insatiable demand for bandwidth.    As an added benefit, the operators eventually get to switch-off the expensive legacy voice systems and run a single, unified IP network.

From a consumer perspective, VoLTE will be touted as a higher quality service and voice will be just one of a number of components including video, text, presence and location.  Mobile operators will push for these RCS (rich communication services) to be integrated with smart phone functionality, so for example, your phonebook will show who is available to talk or if a voice call can be changed to a video call.    While their original plan may well have been to charge individually for each service, the required bundling of SMS with basic consumer plans may well be resetting expectations.     As an example, MetroPCS announced back in October an RCS service called joyn – available on specific LTE handsets in their network.  Pulling-in application developers, AT&T announced earlier this month an API, allowing developers to integrate their apps with AT&T’s IMS architecture, paving the way for joint services and revenue sharing.

So in 2013 we will continue to see OTT players and handset manufacturers (but not likely many operators) drive VoIP services and consumer adoption of these services will likely dictate outcomes.    Any player with a large enough community-of-interest, bundled with a handset partnership could make significant traction – Facebook anyone?      Operators will begin to roll-out VoLTE services as both the LTE networks and handsets with VoLTE calling capabilities reach consumers.  The race for subscribers for both OTT services and VoLTE through 2015 will likely define our industry for the next 10-15 years.

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