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How to survive the OTT invasion as a traditional telco operator

The best operators will be those who are the best partners

With the emergence of OTT players, traditional telecommunication operators need to find viable strategies to react on the pressure occurring from them. Instead of fighting Over-the-Top (OTT) companies, telcos already perceive partnering as a differentiation asset – but what to do, when OTTs are not willing to partner with you? This article will show that operator alliances, well-known from other industries, can give telco operators a real shot against OTTs supremacy

The services and contents offered by OTTs belong to the everyday life
Only a decade ago, there was a time when people mainly watched movies on television, listened to music on CDs or communicated with each other via letters. Our previous articles about OTT partnering  (When competitors turn into partners - OTT partners increase ARPU potential for operators; Challenging the inner beast of telcos - OTT partnering) show that times have changed: Nowadays, the services and contents offered by Over-the-Top (OTT) companies like Whatsapp, Netflix or Spotify belong to the everyday life of millions of people all over the world who use them intuitively as if they have never done anything else. Borne by the tech-savvy Millennials – the generation of people born between 1980 and 2000 and the first generation that grew up with smartphones – the number of OTT players is constantly growing. And so is their impact. 

Today, operators no longer act as gateways for OTTs to specific markets or countries
While the emergence of OTTs simplified the daily routine of many people, it put a lot of pressure on the businesses of traditional telecommunication operators, as their ever-improving networks enable the provision of such services. According to our research, WhatsApp, Facebook and Instagram already outgrew eight major telecommunication operators including Verizon, Vodafone or Deutsche Telekom in terms of subscribers (OTT’s: 2.457 bn. active users compared to 2.110 bn. accumulated mobile subscribers on operators side – see Fig: 1.1). Consequently, the balance between operators and OTTs has shifted: In contrast to the early days of OTTs, operators no longer act as gateways to specific markets or countries.

Furthermore, operators face an increasing competition in certain service categories since OTTs are penetrating the classic territories of operators. The SMS business is an illustrative example of how OTTs (e.g. WhatsApp or Threema) cannibalized operator sales in this formerly lucrative telecommunication business. 

Three ways to react on the existence of OTT
Armed with these insights, it’s up to operators to find viable strategies to react on the existence of OTTs.
1.    Obviously, one solution is to simply block OTT services. However, this strategy, which we describe as attacking strategy, involves the danger of customer churn if other operators are not similarly aligned.
2.    Neutralizing the effect of OTT services can be described as defend strategy, but it is still debatable how customers will react when specific OTT services are highly demanded.
3.    Nevertheless, there is a third alternative: If attacking or defending strategies are unrewarding, by following a cooperation strategy operators may embrace OTTs and benefit from their brand (name) instead of opposing them. Yet, even though operators decide to partner with OTTs to enrich their service portfolio, there might be another problem in entering a partnership. 

Too small? Enter a strategic alliance with other operators 
Just lately we experienced the following: An European telecommunication carrier with a recognizable footprint of two million subscribers was willing to extent the service offer provided to its customers by integrating new top-notch OTT content. At the same time, a large international operator with over 100 million subscribers also considered a partnership with that OTT player. Both operators started negotiations with the OTT-company. Keeping in mind that the integration effort of the OTT service is the same for both operators, the proceedings of the small regional operator ended soon due to its small lever of subscribers and greater negotiation power of the OTT. Indeed, research show, that 80% of telecommunication operators are too small and hence not suitable for many OTT players with millions of active users. This leads to a dilemma for small or medium sized operators as shown in the example: On the one hand, they are forced to consider a partnership with OTT-providers but on the other hand, their footprint is insignificant for large OTT to benefit from such a partnership. 

Successful examples: aviation and sport
In our perspective, entering a strategic alliance with other operators offers a way out of this dilemma and gives telecommunication carriers a real shot against OTTs power. Examples from other industries proof that partners can mutually benefit from such an alliance model. Star Alliance, a global alliance of 27 airlines, for instance, is successfully coordinating joint marketing efforts for almost 20 years now. By doing so, Star Alliance circumvents the rules preventing international airline M&A’s and represents the largest global marketing network within this industry. Deutsche Fußball Liga (DFL) is another example from the sports industry. The DFL acts as an authorized proxy for all 36 football teams of the Germany’s first and second division to commercialize the (overseas) broadcasting rights. Both examples differ in the nature of the relationship between the alliance partners. Whereas participants of the Star Alliance are selected based on their footprint portfolio and the participants of the DFL model are rather highly competitive and unbalanced in size and market power. 

Homogeneous or heterogeneous partnership?
Adopting those models to the telecommunication market means that operators can follow the Star Alliance approach by establishing a partnership with operators from other countries. In contrast, by applying the DFL model it is also possible to partner with competing operators from the same country or region. This approach may be applied when operators seek to partner with an OTT provider that offers a service that is requested by a large number of people - independent from their operator (e.g. Facebook or Spotify).

The four stages of the set up of an operator alliance
Let us therefore take a closer look on how such operator alliances can be set up in reality. We identified a four-staged partnering pyramid with the dimensions complexity and added value (see Fig. 1.2.) representing the evolution of partnering services. Both dimensions increase with the level of the partnership.

1. Knowledge Exchange
On the first stage partnering activities are restricted to a rather unstructured and loose exchange of knowledge on Go-2-Market experiences, portfolio strategy, pricing or information on general experiences with specific OTT companies. On this stage both the set up complexity as well as the added value are on a relatively low level.

2. Pool of partnering experts
The second stage consists of a pool of partnering experts bundled in a joint partnering entity. Those specialists are providing the members of the alliance with know-how and expertise in implementing or securing their joint activities. 

3. Central hub
By establishing alliance services like the bundling of partner contracts or the set-up of a central infrastructure, a partnering entity as indicated in the third stage realizes economy of scales. In contrast to the second stage the support with expertise and knowledge is extended to real services facilitating the alliance’s work. Hereby, a central hub is installed, acting as a platform to coordinate and govern the joint partnering activities between the participating parties. 

4. Virtual single entity
On the fourth stage, finally, the establishment of a legal entity constitutes the most advanced level of partnering between operators. This stage can be compared to the example of the highly competitive DFL partnership. The legal entity acts as a gateway between all operators involved and OTTs and is initiated ideally by one main operator. Being the single point of contact this type strengthens the position of operators towards OTT players as their potential subscriber base is leveraged. On behalf of the members, the entity is focusing on finding, evaluating, selecting and negotiating with promising OTTs. Moreover, OTT integration is facilitated as the required connections and structures are already in use.

It is easy to imagine that the establishment of such an entity requires both considerable financial and managerial efforts by all participating operators. This is why we consider this stage as a future state. Nevertheless, in past partnering projects we have seen that the trend is clearly towards such alliances with a centralized governance. Though all partners will benefit from this partnering model, we hold that the initiator will generate the most value.

Knowledge exchange: The Deutsche Telecom partnership initiative
Deutsche Telekom’s partnership initiative (see the official press release here: http://bit.ly/2fWgoPe) constituting the first stage of the partnership pyramid – knowledge exchange – proofs that joint operator OTT partnering activities are not just academic mind games. Nine leading telco-operator in total have built an alliance to face the new challenges of rising OTTs together. By today more than thirty innovative relationships with business partners such as AirBnB, Spotify or Mojio have been established based on this alliance. The benefit of the knowledge exchange on the first stage has not been clearly evaluated yet. It is certain that it only creates value and impact, if it is shared cross-departmental within the organization.  
Accordingly, Christian von Reventlow, Chief Product & Innovation Officer at Deutsche Telekom states: "Partnering becomes more and more important. We as operators can provide partners with the best networks and easy distribution to customers. And the partners enable us to provide our customers with the best and most innovative products and services. This is a perfect win-win-situation for all. Therefore I’m very happy that we were able to build this powerful alliance." 

In the near future the best operators are those who are the best partners
Decreasing revenue streams of operators can be compensated through operator alliances with OTT players. With giants like Google and Apple entering the carrier business, operators have to watch out not to be left behind for good. Once the adequate operator partnering model is chosen as a source of innovation and new revenue streams, operators need to make sure that they address organizational challenges that stand in the way of that partnership. That includes the set-up up of an environment, which embraces change and risk as well as the facilitation of joint partnering activities. OTTs have come to stay and telco operators have started to realize that partnering with other operators may be the way forward. 

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