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]

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.]

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