Distilling market noise into market sense

VisionMobile is the leading research company in the app economy and mobile business models. Our research and workshops help clients compete and win in their rapidly changing industries.

The Fight for Voice: The saga of telcos vs. OTT players

[The golden era for telcos is slowly coming to an end, as they face increasing pressure from OTT (Over the Top) players, like Viber and Skype. Guest author Paul Golding assesses the disruption of Internet players to the telco industry and envisions the future of Voice]

VisionMobile - Telcos vs. OTTs - The Fight for Voice

Carriers have built vast empires and generated piles of cash by doing what ‘it says on the tin’: carrying voice. Not long ago, their services were the only way to carry voice over wired or wireless connections. However, the internet changed the game. With affordable and fast enough data connections, plus the freedom to install their own apps in a growing base of smartphones (at around 35% of total handset shipments in Q4), users can pick-and-mix alternative voice solutions, like Skype, Vonage or Viber.

Early Skype users would have experienced the mode of disruption documented by Clayton Christensen in his book Innovator’s Dilemma. Skype provided a low-cost (free) alternative to incumbent solutions, but with a fairly poor user experience characteristic of a disruptive early-stage technology. Sure, VoIP wasn’t that new, but as a downloadable offering to the masses via an ordinary household internet connection, it was.

From Disturbance to Disruption

As Christensen’s theories predicted, carriers mostly saw Skype as a minor disturbance, insufficient to warrant revision of their strategies.  But it marked a pivotal moment in the evolution of communications, which was the unbundling of voice from the carrier network. In other words, consumers can take their data connections from carrier X and their voice services from provider Y: Skype, Viber, or whomever. The industry refers to these unbundled services as “Over The Top” (OTT) solutions.

However, the minor disturbance has become, well – disturbing – at least to some carriers. The modes of disruption have been aided by several key trends, in no particular order:

  1. Open (enough) device operating systems – Android and iOS
  2. More afforable data tariffs and speedier internet connections
  3. Dramatic lowering of barriers to entry for internet platforms of all kinds
  4. Consumer behavioural changes
  5. Increase in carrier inertia preventing timely responses to OTT threats

These trends, and more, are covered extensively in my new book “Connected Services,” which, like this blog post, I wrote using my own “notes from the field” in the last 21 years of working in mobile generally, but the last 7 years specifically trying to evangelize Web paradigms to the boards and senior management of various carriers.

Open Device Platforms = choice

The consequence of open smartphone platforms is increasingly well understood. It enables users to choose how they want to experience their communications services. Viber is one of the best examples. It essentially replaces the standard dialer on the device with a custom one, not too dissimilar in experience, but enables calls to be placed for free via a data connection.

During the catastrophic Java ME era, before Android, replacement of the dialer on the phone was unthinkable. That’s all changed. The iPhone still doesn’t quite enable a seamless replacement of the dialer, as it won’t run an alternative at “boot-up,” but Android certainly does. Mr Number, a Palo Alto start-up, are busy exploiting this fact to provide an alternative Android dialer that essentially “unbundles” the calling and messaging experience, initially to manage call and texting spam. However, as with all disruptive technologies, the initial service is only the thin edge of the disruptive wedge. It is easy to imagine plenty of powerful disruptive scenarios orchestrated by or between these types of solution, enough to push the carriers out forever.

Faster, Cheaper Connections

Better technology gives us more bits for less money. Here in the US, that trend has jumped dramatically with the widespread availability of 4G (LTE) connections and devices. There is a class of users today who don’t need to talk that much, or at all, and so can easily do so via their data bundle using an app like Viber. In other words, they don’t need any voice minutes. These are the early adopters who threaten to disrupt carriers by usurping the “Carrier X” experience with the “Viber experience” or the “Whatsapp” experience. That road leads to obscurity and eventual death no matter how loudly and often marketing say “we’ve got the brand.”

Low-cost Low-friction Software Platforms

The remarkable fact about Viber, Mr Number and other OTT apps is that they are built by tiny start-ups with comparatively little budget but stellar teams. These financial lightweights are busy stealing the core communications experience away from carriers who might spend more on a single TV ad than the budgets of many of these start-ups combined.

The power of the developer has increased dramatically in the last few years and continues to grow. The proliferation of Software-, Platform and Infrastructure-as-a-Service products has lowered the barriers to entry to a point where any aspiring entrepreneur and a few developers can build services on tiny budgets that can challenge mighty carriers.

Moreover, entirely new breeds of software platforms have arisen to meet the needs of start-ups with aspirations in the voice and messaging world. Twilio is the perhaps the most talked about example. They provide powerful voice and messaging APIs without investing a single cent in infrastructure. Upon visiting their offices in San Francisco, they took great delight in revealing their “sophisticated” infrastructure – a solitary and lonely router sitting in an otherwise empty wiring closet. It would be funny if it wasn’t so painfully true. Twilio is built using Amazon’s Web Services, as are so many start-ups these days, starting at only a few dollars a month!

The emergence of a category of Communications-as-a-Service (CaaS) providers is an interesting development in the platforms market. Twilio were not the first. Companies like Voxeo were already there with services like Tropo.com, also offering powerful voice and messaging APIs with on-demand pricing to developers. I know that many of the well-known “darling” messaging start-ups in Silicon Valley are using Tropo “under the hood.” There are even companies specializing in API-enabling technologies, like apigee.com and developer-community design agencies, like AlphaPunk, such is the nature of software ecosystems.

Shifts in Consumer Sophistication

Blackberry Messenger, Whatsapp, Viber, Skype are no longer used by nerdy early adopters. Grandparents are using Skype to keep in touch with their grand kids. Indeed, a whole class of use cases has arisen just around Skype, from remote learning to baby-sitting. The tipping point for this shift has been the apps revolution, accelerated by the iPhone. Thanks to the marketing education of Apple and others (“there’s an app for that”), it is so easy to install an alternative service via the click of a button – one click and the “Carrier X” experience is toast!

Increase in Carrier Inertia

Relative to “born on the Web (2.0)” companies, carriers are the proverbial tortoise alongside the hare. They have exceptionally powerful voice and messaging apparatus, but not available in any form that enables innovation to happen.

Contrary to what some might think, carriers are not dumb. This is a point explored well by Christensen in his analysis of companies who failed to respond to disruptive innovation – “these weren’t companies run by idiots.” However, carriers do have is inertia, aggravated by the following factors:

  1. Their IT systems are too complicated, lacking in agility and mostly deployed in tactical “stove-pipe” fashion. By the way, even early dot.com darlings, like Yahoo, have the same problem (perhaps counter-intuitively for so-called “Silicon Valley” companies).
  2. IT systems are managed by external vendors with typically long development cycle times.
  3. Carriers are NOT technology companies. They lack the software expertise of a Voxeo or Twilio, who build their own platforms.
  4. The necessarily risk-cleansed IT frameworks and paradigms can’t in any way support agile innovation, even if carriers wanted to (and some of them do).

Running Across Quicksand

Carriers like Telefonica are trying to do something about the OTT threat by simply embracing it, like with their Network-as-a-Service initiative BlueVia and their Viber-like client, called O2 Connect. They are amongst the most innovative of carriers, relatively speaking.

In my earlier work for Telefonica and O2 UK, the order of the day was to preach the mantra of low-friction platforms. Some success was achieved through the introduction of relatively radical platform ideas. One example is hashblue.com, the cloud storage solution with its real-time texting API. It was built in a matter of weeks, API first, using software technologies du jour, including so-called “No-SQL” storage and “trendy” languages. However, the messaging integration took up to three times longer to “implement,” by which I mostly mean configure some settings deep in the bowels of the infrastructure.

A more ambitious initiative was connFu, a project to build a set of low-friction web-friendly voice and messaging APIs in a Tropo.com fashion. Indeed, it is public knowledge that Telefonica collaborated with Voxeo in the production of Rayo, a new web-friendly API for building real-time communications services. The approach was 100% “Web 2.0” and light years ahead of other carriers, yet still not aggressive enough compared with the ongoing onslaught of OTT solutions. So why isn’t it enough?

Software DNA

It all boils down to one thing – the rise of the developer (facilitated by all of the above trends). Carriers have always had a rocky time figuring out developers and software paradigms. Even now, they mostly continue to misunderstand how software economics really work, in general, never mind the outlying, yet tremendously influential, innovation machine of Silicon Valley, which is like a mini empire of developers.

It isn’t just about app stores and their rev-share models! The software ecosystem that surrounds the Web is far more sophisticated and penetrating. Developers, by which I mean all those engaged in the ecosystem, not just the stereotypical “Garage guy” (which is how many carriers perceive them) yield increasingly significant power over the way that digital services are consumed and will be consumed in the future. This is an inescapable fact.

The digital revolution is all taking place via software, up and down the stack – from new database technologies, through new operating systems, all the way up to the apps, which are mostly the tip of the software iceberg that the carriers are crashing into. Nonetheless, the band keeps on playing on the deck and the porters keep shuffling the deck chairs in vain, yet well intended, attempts to innovate. But most of this will come to nothing and the OTT guys will triumph until carriers realize that having software DNA is a necessary condition for innovating in the world of digital services that many carriers believe they occupy. This too, is an inescapable fact.

- Paul

[Paul Golding is originally from the UK, but now living in Palo Alto, US. He has 16 patents in mobile and is the author of several leading books about mobile apps and mobile strategy, used in top companies and universities. In his 21 years in mobile, he has been Chief Architect, CTO and various senior tech/product roles for companies across the world, from start-ups to multi-nationals.]

  • http://twitter.com/vincentbir @vincentbir

    You nailed it, the Software DNA is missing from Mobile operators, subsequently they are not able to offer innovative, differentiated products.

  • @outofcoverage

    Good article. However I think you can take this up a level and say that operators do not understand what customers value about the service they provide. I have been in meetings with operators who truly believe that customers are buying access to cellular radio. The reality is that customers buy a managed service environment (voice calls, texts and sometimes some interesting multimedia service). As Orange UK with Signal Boost (amongst others) have shown customers are willing to use their own wifi and pay for the services over it. The situation is so messed up that many operators are now about to launch LTE (the next radio technology) with a crippled voice service. When they do, what better for operators to flock to Skype, Google Talk and whatever comes out of Apple's stables in this space. If operator's do not wake up their worst nightmare of being just a bit-pipe will happen very quickly.

    • http://twitter.com/pgolding @pgolding

      Christensen covers this his follow-up book "Innovator's Solution," where he explores the question: "What job is a customer hiring the product to do?" He gives the example of customers buying milkshakes not as a fruit-flavoured milky drink, but as a convenient portable breakfast for consuming in the car on the way to work. It's similar to the Parker Pens story, early on in the "management consulting" era, being told – to their amazement – that they were actually in the pens-as-gifts business, not the pens-as-writing-implements business.

      Christensen does attempt to apply his thinking to mobiles by offering the Blackberry as an example of a device that solves a messaging problem, which for him is a departure from the ordinary function of a mobile phone. I don't find his example that illuminating for carriers.

      Taking voice alone, we can't really apply the logic either because none of the OTT players, like Skype or Viber, have provided us with new voice modality.

      For me, the more insightful examples are the social network and Twitter. For years, before Facebook was even dreamt of, mobile users were using their mobiles to create and store social connections – the address book was an integral part of the user experience. Similarly, users were constantly updating their "status" via text messages.

      In my first book "Next Generation Wireless Applications," I explained how using an open (programmable) address book and a portable format like FOAF (friend-of-a-friend) could transform the mobile network into a platform. However, returning the software DNA issue, such ideas were simply unrecognisable by carriers as even remotely useful, never mind valuable to their users. "Software DNA" is a much wider idea than simply knowing how to write code. What many outside the Web fail to recognise is that the so-called "Web 2.0" wave of innovation was as much as culture and mindset as it was about software and start-up "patterns."

  • PeepingTom

    "if operator's do not wake up their worst nightmare of being just a bit-pipe will happen very quickly." In reality haven't they always been a bit-pipe? When was the last game changing thing the networks introduced? All the real innovation has come from outside of the networks (Apple etc) and even SMS was introduced by "accident". Their massive marketing and overheads just make us think that they are more that what they really are. Just ask any of them how much revenue they make from their innovations such as consultancy and managed services (which aren't exactly game changers anyway). Isn't it a business travesty that they "spend more on a single TV ad than the budgets of many of these start-ups combined." For all the talk about being customer centric, would their customers rather have a new TV advert or a great new app? Imagine if the networks had never bought these expensive Emperor's new clothes? They'd either be enjoying very large margins or we'd be looking and landlines in the same was a faxes. And I personally don't see what is so wrong with being a bit-pipe. As long as your business model is structured appropriately, you can make a very nice living out of being a utility.

  • Christian

    I think it is important when discussing the future of telecoms that we make a clear distinction between access/connectivity products and communications services. Telcos are well posistioned as providers of data access -and the increased usage of (OTT) services is also clearly showing the value of the access layer. Without connectivity you can't access the services you love… Just remember when operators launched 3G back in the days. There wasn't a clear value in the increased data throughput. It is only in the last 4-5 years that this has become evident due to the "revolution" on the/seperation of the service layer. It is time to reconsider the term "being JUST a bitpie"…

    As goes for communication services, that is a different game. Voice and messaging are becoming inherent parts of games and social networking services, as we speak -where you communicate within the context you reside. Still the Telco communication services are the only "universal" ones. All the rest represent unconnected "islands" (as of now). The picture of communication services will change a lot in the years to come -and not necessarily in the favour of the good old Telcos…

  • http://twitter.com/ajalota @ajalota

    > Here in the US, that trend has jumped dramatically with the widespread availability of 4G (LTE) connections and devices. There is a class of users today who don’t need to talk that much, or at all, and so can easily do so via their data bundle using an app like Viber.

    I'd love to ditch the voice portion of my monthly bill, but I have no choice. Why would the carrier ever let me have a data-only plan?

  • http://www.cygnismedia.com/social-media-application/custom-facebook-application.html Cygnis Media

    I'd like to direct your attention to this post over at Vision Mobile. It's an interesting read from the perspective of Paul Golding, someone who has been in the mobile communications business for 21 years. For anyone who has ever wanted to call down evil upon a large telco (in other words, all of us) you will appreciate what he has to say. I especially appreciated the explanation of why carriers are not "dumb" even though it seems that way. They have something even worse than being dumb – read on to see what it is. It's a good lesson for anyone providing a service.

VISIONMOBILE BLOG

Distilling market noise into market sense

The 3 key Apple Watch features that nobody talks about. Yet.

apple-watch-09

If Apple wants to create a new, large product category out of smart watches, it must empower developers to discover…

Continue reading ...

Uber API launch validates the “Gurley scenario”

Uber API

[With the release of Uber’s API, their ploy to achieve world domination has just gotten a lot more probable. Uber…

Continue reading ...

Will developers stop playing the app lottery?

illu

[How long will developers be loyal to ecosystems that seemingly set them up for failure? The odds are clearly stacked…

Continue reading ...

VISIONMOBILE STRATEGY

Workshops & research on Developer-centric Business Models

Apps for connected cars? Your mileage may vary

Automotive-report_illustration_web

Car makers are now entering unfamiliar territory as some of their latest product innovations have nothing to do with driving.…

Continue reading ...

M2M Ecosystem Recipe

M2M-Ecosystem

M2M is rapidly approaching a tipping point. Lower technological barriers pave the way for new entrants in the market. As…

Continue reading ...

Mobile Innovation Economics

profit recipe

Mobile Innovation Economics is a strategy workshop focused on business models and asymmetric competition of mobile ecosystems. Mobile ecosystems are…

Continue reading ...

VISIONMOBILE RESEARCH

Research on the app economy and developer ecosystems

App Profits and Costs

AppProfits

This research report examines the critical success factors for a profitable app, and how business and technology choices, such as…

Continue reading ...

Developer Segmentation 2013

Developer Segmentation 2013

The Developer Segmentation 2013 report delivers a needs-based segmentation model that actually works, with extensive profiling of the eight principle…

Continue reading ...

App Economy Forecasts 2013-2016

App Economy Forecasts

This report investigates the relative sizes of the app economy: developer population by region and platform, distribution of revenues, revenue…

Continue reading ...