There was a time not long ago when mobile phone operators began to realise that voice calling was a low-margin commodity and they needed a better way to make money. As short messaging service caught on, they were confident they'd found a more lucrative solution. Now SMS is under siege from internet-based chat applications, which are also threatening mobile operators' voice business.
Globally, mobile operators are seeing a decline of 20-30% annually in SMS usage, according to Ovum, a telecoms consultancy. Applications such as Skype, WhatsApp, Viber, WeChat, Line and Facebook Messenger -- known as over-the-top (OTT) services in the industry -- are seeing exponential growth in their user bases.
WhatsApp now delivers about 30 billion messages a day. In China, WeChat doubled its user base to 200 million in only six months. In South Korea, 90% of mobile phone subscribers use KakaoTalk every day.
A notable impact has been felt in India, for instance, where the Telecom Regulatory Authority of India (TRAI) reported an 18.3% decline in SMS usage in June 2014 compared with a year earlier, almost entirely due to an increase in OTT messaging traffic.
"Operators' SMS revenue in India has come under pressure due to popular services like WhatsApp, with over US$1.5 billion in SMS revenues lost by mobile operators in 2014," said Neha Dharia, a senior analyst at Ovum.
"However, SMS revenues are a small part of their total revenues; voice is their main revenue channel. Therefore, the growing popularity of voice services such as WhatsApp and Viber will have an even stronger negative impact on voice revenues."
The OTT wave hasn't overtaken the voice market yet but it's starting to transmit a soft warning signal. Accenture, a technology consulting firm, has estimated that voice revenue worldwide will contract by an average of 2% a year between 2012 and 2017.
Improvements in the quality of voice over internet protocol (VoIP) calls are the main reason behind the shift to greater usage of OTT apps for voice communication.
Analysys Mason, an international consultancy, reports that 20% of smartphone users are now active mobile VoIP users, and some are beginning to use VoIP apps as their primary voice service. Even though the numbers are still small, mobile network operators are in danger of becoming secondary, rather than primary voice service providers.
For example, traffic on Skype is now almost 40% of the size of the entire conventional international telecom market, and in growth terms it far outpaces the combined growth in voice-calling minutes of the global telecom industry, according to industry reports cited by TRAI.
"Globally, there is no doubt that we are moving from a voice-centric world to a data-centric world as far as operators are concerned," said Karianne Melleby, head of global partnerships at Telenor Group, the Norway-based parent of DTAC in Thailand.
"In many ways, voice calling has become a commodity product. Part of the reason is the development of VoIP services, which have taken over from some existing voice revenues."
However, in less-developed countries where internet penetration is low and network quality is spotty, the OTT voice market is still tiny. As well, mobile operators fend off competition by keeping voice tariffs extremely low -- India has the cheapest voice calls in the world. But for a country with early-stage telecom infrastructure such as Myanmar, where call tariffs remain high, internet-based calling, notably via Viber, is very popular.
On the other hand, mobile industry optimists like to believe that the increasing dominance of OTT services could create opportunities for network operators to develop new revenue channels.
Having invested huge sums in their networks and realising that the future is in leveraging their ability to transmit data, operators need to change the way they charge. OTT consumers now pay for internet bandwidth -- on a monthly basis in most cases -- but nothing per call or message.
APPS IN CONTROL
Concerned that OTT services could threaten mobile operators, regulators in some countries in Asia, such as Malaysia and India, have discussed proposals to regulate OTT players.
In India, mobile operators approached the TRAI about levying a charge for the use of OTT services, such WhatsApp and Viber. Consumers got wind of the proposal and expressed their objections to the idea of paying new incremental charges on top of monthly data tariffs, and the regulator quickly dismissed the idea, according to Ms Dharia.
"A lot of operators in Asia are currently reviewing the impact OTT players have on their businesses, though there are very few cases of actual regulatory intervention," she said.
Some countries in the Middle East banned services like BBM, Viber and WhatsApp voice. But after they reached agreements with mobile network operators about data sharing, they were back in business again.
Globally, there are no laws to regulate OTT players, except in Chile which does not permit the selling of bundled data packages.
However, in most cases, mobile operators are trying to develop data plans that charge an extra fee for OTT usage on their networks. Regulators usually don't object, but any such fees have to be carefully thought out.
"The charge should be low enough that it doesn't burden the customers," said Alexander Rusli, the CEO of Indosat, one of the leading telecom service providers in Indonesia.
"You have to balance it somehow. If you charge for everything from the start, people don't download and they don't use our data network … that's the problem."
There are different ways of charging customers, he said, but the bigger question is the extent to which users should be charged. At the end of the day, customers will pay if they feel the need and if they don't think it's a burden.
"Regulations are very market-specific and involve a whole range of factors from pricing of mobile services to safety and security. Regulators must understand the role mobile plays in their market and analyse the implications of regulating the industry in their market," Ms Dharia explained.
She sees legislation to regulate OTT players as unlikely, since it would be seen as inhibiting innovation and industry development. "At most, there might be guidelines on the usage of OTT voice services as that has the biggest and most direct impact on mobile operators' revenue."
CONTENTION OVER COST
OTT players offer similar, or even better, features compared to traditional services such as SMS and voice calls, and they are regarded as threats to operators, stealing traffic and slowly eating up their main revenue sources without having to invest much in networks.
"The money that [operators] are investing is far more than what OTT players, which already have a very small cost base, spend on their startups. WhatsApp, for example, started in a garage," Ms Dharia said.
Mobile operators are investing huge sums in 3G and 4G networks, without which OTT players wouldn't be able to function, much less make money.
Worried operators complain that they jump through endless regulatory hoops just to get started, while OTT players can come in and offer the same services over the top with minimal cost.
Though most OTT apps are free to download, they try to make money through selling advertising and promoting other services including in-app purchases.
Line, the most popular app in Japan, Taiwan, Thailand and many other countries, sells stickers and generates other revenues through self-created gaming apps. It also has expanded into bricks-and-mortar retail stores, selling products based on its popular cartoon characters.
"We have never forced users to purchase," the Thai unit of Line said in a statement. "Not only Line, but also all entities, have a reasonable logic [of charging customers] depending on the service details and market demand."
As their revenues grow, OTT players are now looking at new services including internet access, which has pushed complacent mobile operators to rethink their strategies.
"OTT players have minimal cost for operations, but they are gaining more revenue so they can invest and expand in infrastructure to compete," Ms Dharia said.
"Google and Facebook are doing it on a massive scale. A lot of [OTT] companies are prioritising investment in connectivity. You can see that they are moving toward total infrastructure provision."
Google, for instance, is providing fibre-optic network services to selected customers. Apple is rumoured to be looking at ways to provide wireless service directly to its iPad and iPhone customers in collaboration with a mobile network operator. Facebook has launched internet.org to bring low-cost Web access to underserved parts of the world.
"OTT players are taking part in providing connectivity, so maybe in five or six years down the line, they might even take over that aspect. So that's not really a big threat yet, but it is a threat," Ms Dharia told Asia Focus.
However, not all operators view OTT players as a threat. "OTT is the reason why people use our data, and we see them as an ally," said Mr Rusli, the Indosat CEO.
Chua Sock Koong, the group CEO of SingTel, Southeast Asia's largest telecom group, is another glass-half-full executive.
"While OTT players have eroded some traditional telco revenues such as voice and SMS, they have also presented a game-changing opportunity since telcos power the mobile internet," she said.
"OTT is a new reality for the telecoms industry around the world, but we don't see it as a zero-sum game. This means that we are in the best position to collaborate with OTT players to stimulate and drive data usage."
In Australia for example, Ms Chua said, the company's wholly owned subsidiary Optus has teamed up with Netflix, the provider of internet-streaming media such as movies, to let customers receive Netflix subscriptions when they sign up for certain Optus plans.
"Throughout the five-month Netflix offer, Optus generated positive customer growth in both home broadband and postpaid mobile," she said.
In the Philippines, the SingTel affiliate Globe Telecom partnered with Facebook and gave its customers free unlimited access to the site and app for a limited time. This promotion, along with various other digital initiatives, resulted in double-digit growth in Globe's mobile data revenue in 2014.
Beyond partnership, SingTel has created its own OTT services to boost data usage. In January it set up HOOQ, a joint venture with Sony Pictures and Warner Bros to provide OTT video streaming. HOOQ was lunched in the Philippines in March, and recently in Thailand and India.
In terms of voice and messaging, the GSM Association now offers Rich Communication Services (RCS), which provides OTT-like services on cellular in Spain, Germany, France the US and South Korea.
The general perception about the relationship between OTT and mobile operators is of heated competition, but experts believe collaboration and partnership will be the way forward.
"We are going to see a lot more OTT players and mobile operators partnering up because mobile operators need OTT players and vice versa," said Ms Dharia.
Ms Melleby from Telenor agreed that her company needed OTT services to make its network more attractive to customers. "We are trying to better understand the potential of our network and how we can take the advantage of delivering services in real-time," she said.
Line also considers itself a potential partner to work with operators. The Japanese company's services and campaigns, it said, have created revenue-generating opportunities for mobile operators.
For example, Line family apps are included in some data packages with local telecom operators. "We believe that this effort will enable mobile operators to drive revenue and achieve long-term business success," a company spokesman said.