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European Summit 2013: Enabling innovation, driving profitability © Analysys Mason Limited 2013

Generating more revenue from VAS: OTT communication and media strategies

European Summit 2013:

Enabling innovation, driving profitability

10 October 2013

EVENT PARTNER:

Generating more revenue from

VAS: OTT communication and

media strategies

Stephen Sale and Cesar Bachelet



Digital data and ubiquitous high-speed connectivity have enabled the emergence of OTT services

2

OTT and the possible disintermediation of operators

Infrastructure Services Devices

Operators

Providers of OTT

services Device

manufacturers Operators


Generating more revenue from VAS: OTT communication and media strategies 3

Communication services

Media services



Players from across the mobile value chain are moving into communication services

4

Network

connectivity

Content and

applications

OS

Hardware

Reta

il/dis

trib

ution

Operator services as

defaults in the native

dialler




5

Network

connectivity

Content and

applications

OS

Hardware

Reta

il/dis

trib

ution



dialler

A wide range of

downloadable

alternatives




6

Network

connectivity

Content and

applications

OS

Hardware

Reta

il/dis

trib

ution



dialler

Handsets offer

alternative native

features…

A wide range of

downloadable

alternatives




7

Network

connectivity

Content and

applications

OS

Hardware

Reta

il/dis

trib

ution



dialler

Handsets offer

alternative native

features…

A wide range of

downloadable

alternatives

…increasingly

presented as default




8

Network

connectivity

Content and

applications

OS

Hardware

Reta

il/dis

trib

ution



dialler

Handsets offer

alternative native

features…

A wide range of

downloadable

alternatives

Tighter integration

forthcoming?

…increasingly

presented as default



Player Core

business

Feature set Comms

business model Voice Messaging Video Location Social

Hardware Indirect

Advertising Indirect


Software

licensing Moving to indirect

Communication

services Direct

Content

distribution Indirect

MNOs Communication

services? Direct

Operator feature sets look increasingly weak against alternative services driven by new business models

Figure: Communication services business models [Source: Analysys Mason, 2013]



Player Core

business

Feature set Comms


Hardware Indirect



Software


Communication

services Direct

Content


MNOs Communication

services? Direct



Value of communication services

increasingly co-opted



Player Core

business

Feature set Comms


Hardware Indirect



Software


Communication

services Direct

Content


MNOs Communication

services? Direct



Increasing overlap between comms

services and social networking



Player Core

business

Feature set Comms


Hardware Indirect



Software


Communication

services Direct

Content


MNOs Communication

services? Direct



Operators’ standalone value

proposition looks weak



Alternative messaging services have gone mass-market in some countries, while VoIP penetration remains low

13

Figure: VoIP penetration of smartphones Figure: IP messaging penetration of smartphones

0%

10%

20%

30%

40%

50%

60%

70%

Tota

l

Fra

nce

Germ

any

Pola

nd

Spa

in

UK

US

A

Perc

enta

ge o

f re

spondents

0%

10%

20%

30%

40%

50%

60%

70%

Tota

l

Fra

nce

Germ

any

Pola

nd

Spa

in

UK

US

APerc

enta

ge o

f re

spondents



IP messaging volumes are reaching parity with SMS on smartphones

14

Figure: Share of smartphone minutes in Western

Europe, 2012

Figure: Share of smartphone messaging in

Western Europe, 2012

Operator Non-operator Operator Non-operator

290 billion

minutes

(95%)

265 billion

messages

(54%)

225 billion IP

messages

(46%)

15 billion

VoIP

minutes

(5%)



New services aim to enhance the user experience for operators’ installed base

15

Service

Features

Pricing

Commercial

objective

• Voice/SMS over

Wi-Fi

• Multi-device

access

• Visual voicemail

• Cloud storage of

timeline

• Calls/texts drawn

from bundle

• No subscription

charge

• Extend presence

across devices

• Limit

substitution

• Free on-net VoIP

and messaging

• Off-net calling

• ‘Smart chat’

• Customisable

visual voicemail

• Cloud timeline

• Freemium (OTT)

• Subs packages

via Orange

operating co’s

• Limit

substitution

• Product

differentiation

• Multi-device

access for voice

and messaging

• On-net video

chat

• Cloud storage of

contacts

• Calls/texts drawn

from bundle

• Int’l call packages

• Phone add-on

• Extend presence

across devices

• Limit

substitution

• Chat/group chat

• File sharing,

including live

video

• Typically linked to

data plans

• Some operators

zero-rate traffic

• Limit

substitution



Communication services should not be viewed in isolation; operators have indirect business models, too

16

Network

connectivity

Communication

services Retail/distribution

Weakened service

portfolio

Focus on

monetisation of

data

Weakened role

here, too




17

Network

connectivity

Communication


Weakened service

portfolio

Focus on

monetisation of

data

Weakened role

here, too

Improved service

portfolio




18

Network

connectivity

Communication


Weakened service

portfolio

Focus on

monetisation of

data

Weakened role

here, too

Improved service

portfolio

Helps slow

commoditisation

and maintain ARPU




19

Network

connectivity

Communication


Weakened service

portfolio

Focus on

monetisation of

data

Weakened role

here, too

Improved service

portfolio

Helps slow

commoditisation

and maintain ARPU

And supports

initiatives here



Investment models need to adapt to a changing market environment

20

Investment decisions typically based

on NPV/DCF assume revenue

growth

The value of the communication

services business is currently

unknown

But some of its value is in supporting

other parts of the business:

Chiefly connectivity

But also distribution, identity

management, authentication,

billing, location, etc.

Some opportunities for incremental

revenue but, importantly, also

defence of key links in value chain

Figure: Handset ARPU in Western Europe

0

5

10

15

20

25

2012

2013

20

14

2015

2016

2017

EU

R p

er

month

Data

Messaging

Voice



Key takeaways

Communications capabilities increasingly co-opted into indirect business

models

Operator comms feature sets look increasingly weak, though many are

now offering apps to support their basic propositions

Industry uncertainty about platform business models and the long-term

future of communication services

Challenge to build new investment cases on the basis of a broader

understanding of the role of communication services

21



Communication services

Media services



Content creation

Content aggregation

& packaging

Content distribution

Devices

OTT video services are redefining the value chain for paid-for video services to the TV

23

Value chains for traditional pay TV and OTT video services

Movie studios

Pay TV operators

Traditional ‘closed’ pay TV model

Movie studios

Broadcasters

Broadcasters

CE device

manufacturers /

vendors ‘Pure-play’ OTT video provider

Retailer

‘Open’ OTT video model



Before we go any further… our definition of OTT video services to the TV

24

Definition of OTT video services to the TV

Any broadband

connection X X



Multiple business models are emerging for paid-for OTT video services

25

Business models for paid-for OTT video services

TVoD

SVoD Web TV

Freemium



OTT video services will account for just 5% of primary pay TV services, but over 50% of secondary services

26

Pay-TV households by platform, Western Europe,

2013 – 2018

Secondary pay TV services by platform, Western

Europe, 2013 – 2018

0%10%20%30%40%50%60%70%80%90%

100%

% o

f p

ay T

V h

ou

seh

old

s

Analogue cable Digital cable

IPTV Pay-DTT

Satellite OTT video

0%10%20%30%40%50%60%70%80%90%

100%

% o

f se

con

da

ry p

ay T

V s

erv

ice

s


IPTV Pay-DTT

Satellite OTT video



Although spend on OTT video services will grow rapidly, it will only account for 6% of pay TV spend in 2018

27

Spend on OTT video services by type of content,

Western Europe, 2013 – 2018

Pay TV spend by platform, Western Europe, 2013

– 2018

0

500

1,000

1,500

2,000

2,500

EU

R,

mill

ion

Web TV TVoD SVoD

0%10%20%30%40%50%60%70%80%90%

100%

Sha

re o

f p

ay T

V s

pen

d


IPTV Pay-DTT

Satellite OTT video



Only 1% of pay TV subscribers cite online video as a reason for ‘cutting the cord’

28

Planned changes to pay TV service Reasons for giving up pay TV service

33%

13%12%

28%

13%

Satisfied with free TV

Satisfied with free TV and free onlinevideoSatisfied with free TV and paid-foronline videoCannot afford any longer

0%

1%

2%

3%

4%

5%

6%

7%

8%

% o

f re

sp

on

de

nts

wh

o a

re p

ay T

V

su

bscrib

ers



Although more than 40% of non-subscribers watch OTT video, only 3% cite it as a reason not to take up pay TV

29

Usage of online video services among non-pay TV

subscribers

Reasons for not taking up pay TV services

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Free onlinevideo

Paid-foronline video

Pe

rce

nta

ge o

f re

sp

on

de

nts

wh

o

don't

subscribe t

o p

ay T

V

28%

19%

3%18%

15%

17%

Free TV sufficientLow TV consumptionOnline video sufficientNot value for moneyNot affordable



Pay TV subscribers are far more likely to own streaming devices and pay for OTT video than non-subscribers

30

Ownership of devices Usage of popular OTT video services

0% 50% 100% 150%

Games console

Smart TV

Internet STB

Connected DVD /Blu-ray

Percentage difference (Pay TV subscribers vs. non-subscribers)

0% 20% 40% 60%

LOVEFiLM

iTunes Store

Netflix

Percentage difference (Pay TV subscribers vs. non-subscribers)



Operator strategies in relation to OTT video services

Operators can capitalise on OTT video in various ways

Cost

control

Revenue

generation

Competition Cooperation

Launching OTT

video services to

extend reach

Delivering own

content to TV via

unmanaged

devices

Delivering own

content to other

unmanaged

devices

Tiered broadband

tariffs

Incorporating

OTT video

content on pay-

TV platform

Offering

solutions to

providers of OTT

video services



Key takeaways

We do not expect a significant number of consumers to take OTT video services as a

primary pay TV service – only 3% of Western European households (amounting to 7.5% of

FTA TV households) will do so in 2018

However, we anticipate that OTT video services will account for 51% of secondary pay TV

services in 2018, amounting to 11% of Western European households

Only 1% of pay TV subscribers we surveyed planned on ‘cutting the cord’ due to OTT

video services, while 3% of the non-subscribers cited OTT video services as a reason for

not taking up pay TV services

According to our Connected Consumer survey, pay TV subscribers were 41% more likely

to use Netflix than non-subscribers, more than twice as likely to own a connected Blu-ray /

DVD player and 35% more likely to own a smart TV

Most traditional pay TV operators can capitalise on this by delivering video services to

unmanaged devices to reduce capex, while incorporating OTT video services within their

offer to maintain their central role

Traditional pay TV operators with suitable content can launch OTT video services to

extend their reach, and thus spread the cost of content over a wider base.

32



OTT comms OTT video

Barriers to entry Low for messaging, falling

for voice and videocomms

Medium (high for content, low

for infrastructure)

Substitution of

traditional services

High for messaging, lower

for voice; little established

position in video

Partial, usage mostly

complementary, rather than

substitutive

Addressable

market

Currently early adopters but

driven by increasing device

penetration

All consumers, but more

attractive to pay TV

subscribers

Impact on

operators

Varies; potentially high Limited revenue impact but

potential cost implications

Ability of operators

to successfully

respond

Variable High

Comparing the impact of OTT services on operators

Comparison of OTT communications and video markets



Any questions?

34



Contact details

35

Stephen Sale

Principal Analyst

[email protected]

Cesar Bachelet

Senior Analyst

[email protected]

Cambridge

Tel: +44 (0)1223 460600

Fax: +44 (0)1223 460866

[email protected]

Dubai

Tel: +971 (0)4 446 7473

Fax: +971 (0)4 446 9827

[email protected]

Dublin

Tel: +353 (0)1 602 4755

Fax: +353 (0)1 602 4777

[email protected]

Edinburgh

Tel: +44 (0)131 443 9933

Fax: +44 (0)131 443 9944

[email protected]

Johannesburg

Tel: +27 11 666 4786

Fax: +27 11 666 4788

[email protected]

Madrid

Tel: +34 91 399 5016

Fax: +34 91 451 8071

[email protected]

Milan

Tel: +39 02 76 31 88 34

Fax: +39 02 36 50 45 50

[email protected]

New Delhi

Tel: +91 124 4501860

[email protected]

Paris

Tel: +33 (0)1 72 71 96 96

Fax: +33 (0)1 72 71 96 97

[email protected]

Singapore

Tel: +65 6493 6038

Fax: +65 6720 6038

[email protected]

Boston

Tel: +1 202 331 3080

Fax: +1 202 331 3083

[email protected]

Manchester

Tel: +44 (0)161 877 7808

Fax: +44 (0)161 877 7810

[email protected]

London

Tel: +44 (0)20 7395 9000

Fax: +44 (0)20 7395 9001

[email protected]

mailto:[email protected]



First Breakout Stream

12:30-1:15 – Breakout Streams: Choose one to attend

Broadband traffic growth and ‘the LTE/fixed access tipping point’: Chris Nicoll

and Rupert Wood

York Suite

Apple/Google/Facebook: mobile and OTT strategies and impact: Ronan de

Renesse and Stephen Sale

Crystal Ballroom (this main room)

The end of M2M and the birth of IoT: Steve Hilton, Principal Analyst, Enterprise

Windsor Suite

36

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