Innovative Business Models: Telecoms Adopting OTT Strategies

Introduction

The telecommunications industry is undergoing a significant transformation driven by the rise of over-the-top (OTT) services and the increasing adoption of emerging technologies. Traditional telecom operators are facing intense competition from OTT players, who are disrupting the market with innovative digital services delivered directly to consumers via the internet. In response, many telecoms are adopting OTT strategies of their own, leveraging their network infrastructure, customer relationships, and technological capabilities to compete in this new landscape.

This analysis explores the innovative business models that telecoms are employing as they adopt OTT strategies, with a focus on how they are utilizing emerging technologies such as 5G networks, edge computing, and artificial intelligence (AI). We will examine specific use cases and case studies of telecom operators who have successfully implemented OTT strategies, and discuss the key metrics they use to measure success. We will also provide a roadmap for adoption, consider the potential return on investment (ROI), and address the challenges and risks associated with this transition. Finally, we will offer insights into the future outlook for telecoms in the OTT era.

The Evolving Telecom Landscape

The telecom industry has traditionally been dominated by a small number of large, vertically integrated operators who controlled both the network infrastructure and the services delivered over those networks. However, the rise of the internet and the proliferation of connected devices has fundamentally changed the way people communicate and consume media, creating new opportunities for innovation and disruption.

OTT services, which deliver content and applications directly to users over the internet, have emerged as a major threat to traditional telecom business models. Companies like Netflix, Spotify, and WhatsApp have attracted millions of users with their convenient, affordable, and personalized offerings, often at the expense of telecom operators' own services such as cable TV, voice calling, and SMS.

The COVID-19 pandemic has accelerated these trends, with lockdowns and social distancing measures driving a surge in demand for digital services. According to a report by McKinsey & Company, the pandemic has compressed five years of digital adoption into just eight weeks, with many of these changes expected to be permanent [1].

Faced with this new reality, telecom operators are under pressure to adapt their business models and find new ways to create value for customers. Many are turning to OTT strategies as a way to stay relevant and competitive in the digital age.

OTT Strategies for Telecoms

There are several approaches that telecom operators can take when adopting OTT strategies, each with its own advantages and challenges.

Content Partnerships

One common strategy is to partner with existing OTT players to offer their services to telecom customers. This can take the form of bundling OTT subscriptions with telecom plans, or integrating OTT content into the telecom operator's own platforms and user interfaces.

The benefits of this approach include:

• Access to popular content and services that can help attract and retain customers
• Reduced need for upfront investment in developing own OTT offerings
• Potential for revenue sharing or other mutually beneficial commercial arrangements

However, there are also some drawbacks:

• Limited control over the user experience and customer relationship
• Risk of becoming overly dependent on partners who may become competitors in the future
• Potential for conflicts over data ownership and monetization

Developing In-House OTT Services

Another strategy is for telecoms to develop their own OTT services in-house, leveraging their existing assets and capabilities. This can involve creating new standalone apps and platforms, or adding OTT features to existing services.

The advantages of this approach include:

• Full control over the user experience and customer relationship
• Ability to differentiate from competitors with unique offerings
• Potential for greater profit margins by owning the entire value chain

However, there are also significant challenges:

• High upfront costs and long development cycles
• Need for new skills and capabilities in areas like software development and user experience design
• Difficulty competing with established OTT players who have a head start and strong brand recognition

Bundling OTT with Traditional Services

A third approach is to bundle OTT services with traditional telecom offerings like voice, data, and SMS. This can help make the telecom operator's overall package more attractive and differentiated, while also providing an opportunity to monetize OTT in new ways.

The benefits of this strategy include:

• Increased customer stickiness and loyalty through integrated offerings
• Ability to capture a larger share of customer spending on communications and entertainment
• Potential for cross-selling and upselling between traditional and OTT services

However, there are also some risks:

• Complexity of managing multiple service types and pricing models
• Potential for customer confusion or frustration if bundling is not done seamlessly
• Risk of cannibalizing traditional revenue streams if OTT is priced too aggressively

Leveraging Emerging Technologies

To succeed with OTT strategies, telecom operators need to not only adapt their business models but also leverage emerging technologies that can enable new types of services and experiences. Three key areas of focus are 5G networks, edge computing, and AI/ML.

5G Networks

5G is the next generation of mobile networking technology, offering faster speeds, lower latency, and greater capacity than previous generations. For telecom operators, 5G represents a major opportunity to enable new types of OTT services and applications that were not possible before.

Some examples include:

• High-quality video streaming, including 4K and 8K resolution
• Cloud gaming and virtual/augmented reality experiences
• Autonomous vehicles and remote control of industrial equipment
• Massive Internet of Things (IoT) deployments with millions of connected devices

However, rolling out 5G networks also requires significant investment in infrastructure and spectrum, as well as new skills and partnerships. Telecom operators will need to carefully balance the costs and benefits of 5G deployment, and find ways to monetize the new capabilities it enables.

Edge Computing

Edge computing is a distributed computing paradigm that brings processing power and data storage closer to the end user, rather than relying on centralized cloud data centers. For telecom operators, edge computing can help enable new types of low-latency, high-bandwidth OTT services that require real-time processing and interaction.

Some examples include:

• Virtual and augmented reality applications that need to respond instantly to user movements
• Industrial IoT and automation systems that require fast, reliable control loops
• Intelligent video surveillance and public safety applications that need to process large amounts of data locally

By deploying edge computing infrastructure in their networks, telecom operators can not only improve the performance and reliability of OTT services but also create new revenue streams by offering edge computing as a service to third-party developers and enterprises.

Artificial Intelligence and Machine Learning

AI and ML are transforming many aspects of the telecom industry, from network optimization and customer service to content creation and personalization. By leveraging these technologies, telecom operators can create more intelligent, adaptive, and engaging OTT services that learn from user behavior and preferences.

Some examples include:

• Personalized content recommendations and curation based on user viewing history and context
• Intelligent chatbots and virtual assistants that can handle customer inquiries and support requests
• Automated video editing and production using ML algorithms to identify highlights and create montages
• Predictive maintenance and anomaly detection for network infrastructure using AI-powered analytics

To fully realize the potential of AI and ML, telecom operators will need to invest in data infrastructure, talent development, and partnerships with leading technology providers. They will also need to carefully navigate issues around data privacy, security, and ethics, which are becoming increasingly important as AI becomes more pervasive.

Use Cases and Case Studies

To illustrate how telecom operators are putting OTT strategies into practice, let's look at some specific use cases and case studies.

AT&T and HBO Max

In 2020, AT&T launched HBO Max, a new streaming service that combines content from HBO with movies and shows from Warner Bros., DC Comics, and other WarnerMedia properties. As part of the launch, AT&T offered free access to HBO Max for certain high-tier wireless, broadband, and TV customers, leveraging its telecom assets to drive adoption of the new OTT service.

The results so far have been promising: HBO Max reached 28.7 million subscribers by the end of 2020, surpassing its initial target of 26 million [2]. AT&T has also been able to use HBO Max as a differentiation point for its telecom services, with one executive calling it a "key acquisition and retention tool" [3].

Verizon Media

In 2015, Verizon acquired AOL, followed by Yahoo! in 2017, to create Verizon Media, a new division focused on digital content, advertising, and technology. The goal was to combine Verizon's network assets with AOL and Yahoo!'s content and advertising capabilities to create a vertically integrated platform that could compete with the likes of Google and Facebook.

While the results have been mixed, with Verizon taking a $4.6 billion writedown on the business in 2018 [4], the company has continued to invest in new content and partnerships. In 2020, Verizon Media launched a new streaming service called Yahoo! Play, which offers a mix of live sports, news, and entertainment content, with plans to add more original programming over time [5].

SK Telecom and Oksusu

SK Telecom, the largest mobile operator in South Korea, has been a pioneer in integrating OTT services with its telecom offerings. In 2016, the company launched Oksusu, a new mobile video platform that combines live TV channels with on-demand content and original programming.

To differentiate Oksusu from other OTT services, SK Telecom leveraged its network assets and partnerships to offer features like ultra-low latency streaming for live sports, AR/VR content powered by 5G, and integration with the company's AI-powered voice assistant, NUGU [6]. The company also bundled Oksusu with its mobile plans, offering discounts and free trials to drive adoption.

The results have been impressive: as of 2020, Oksusu had over 9.4 million subscribers, making it one of the largest OTT platforms in Korea [7]. SK Telecom has also been able to use Oksusu as a testing ground for new 5G and edge computing applications, such as multi-view streaming for live events and gaming.

Metrics for Success <a name="metrics-for-success"></a>

To measure the success of their OTT strategies, telecom operators need to track a range of metrics that reflect both the adoption and engagement of their services as well as their financial performance. Some key metrics to consider include:

• Subscriber growth: The number of new subscribers added over time, as well as the total subscriber base and market share.
• Churn rate: The percentage of subscribers who cancel or fail to renew their service each month or year.
• Average revenue per user (ARPU): The total revenue generated by the OTT service divided by the number of subscribers, typically measured on a monthly basis.
• Engagement metrics: Indicators of how actively subscribers are using the service, such as average viewing time per session, number of videos watched per month, or percentage of subscribers who use the service daily.
• Content acquisition and production costs: The expenses associated with licensing or creating original content for the OTT service, which can be a significant driver of overall costs.
• Customer acquisition costs (CAC): The marketing and promotional expenses required to acquire each new subscriber, which can vary depending on the channels and tactics used.
• Lifetime value (LTV): The total revenue that a subscriber is expected to generate over their lifetime with the service, which can be compared to CAC to assess profitability.

By tracking these metrics over time and comparing them to industry benchmarks and internal targets, telecom operators can gain insight into the performance of their OTT services and identify areas for improvement. They can also use this data to inform decisions around pricing, packaging, content investment, and marketing strategy.

Roadmap for Adoption

Implementing an OTT strategy is a complex undertaking that requires careful planning and execution across multiple phases. Here is a high-level roadmap that telecom operators can follow:

1. Strategy development: Define the overall goals and objectives of the OTT strategy, identify target customer segments and value propositions, and assess internal capabilities and gaps.
2. Technology selection: Evaluate and select the technology platforms and partners needed to support the OTT service, including content management systems, streaming infrastructure, billing and payment systems, and customer service tools.
3. Content acquisition: Develop a content strategy that aligns with the target audience and differentiation points, and secure rights to licensed content and/or invest in original content production.
4. Service design and development: Design the user experience and feature set of the OTT service, and build and test the software and infrastructure needed to deliver it.
5. Pricing and packaging: Determine the pricing model and package structure for the OTT service, including any bundling or discounting with existing telecom services.
6. Marketing and launch: Develop and execute a go-to-market plan to promote the OTT service to target customers, leveraging owned and paid media channels as well as partnerships and co-branding opportunities.
7. Operations and optimization: Monitor and manage the ongoing performance of the OTT service, including content updates, feature enhancements, and customer support, and use data and analytics to continuously improve the user experience and business results.

The timeline for this roadmap can vary depending on the scope and complexity of the OTT strategy, as well as the resources and capabilities of the telecom operator. In general, it can take anywhere from 12 to 36 months to go from initial strategy development to full-scale launch and operation of an OTT service.

ROI Considerations

Investing in an OTT strategy can be a significant undertaking for telecom operators, with upfront costs that can run into the hundreds of millions or even billions of dollars. To justify this investment, it is important to have a clear understanding of the potential return on investment (ROI) and the key drivers of profitability.

Some of the main factors that can influence the ROI of an OTT strategy include:

• Subscriber acquisition and retention: The ability to attract and retain a large and loyal subscriber base is critical to the success of an OTT service. This requires effective marketing and promotional strategies as well as a compelling content offering and user experience.
• Pricing and monetization: The pricing model and revenue streams for the OTT service can have a significant impact on profitability. Options include subscription fees, advertising, transactional payments, and bundling with other telecom services.
• Content costs: The expenses associated with acquiring or producing content can be a major driver of overall costs for an OTT service. Balancing investment in high-quality, differentiated content with the need to manage expenses is key to achieving profitability.

• Technology and infrastructure: The cost of building and maintaining the technology platforms and infrastructure needed to deliver the OTT service can also be significant. Choosing the right partners and solutions, and optimizing for efficiency and scalability, can help manage these costs.
• Advertising and partnerships: For OTT services that rely on advertising revenue, the ability to attract advertisers and command high CPMs (cost per thousand impressions) is critical. Partnerships with other media companies, brands, or platforms can also provide additional revenue streams.

To estimate the potential ROI of an OTT strategy, telecom operators can use financial modeling techniques such as discounted cash flow analysis or customer lifetime value calculations. These models typically involve forecasting subscriber growth, revenue, and expenses over a multi-year period, and comparing the net present value of the expected cash flows to the upfront investment required.

While the specific ROI will vary depending on the market, competitive landscape, and execution of the OTT strategy, some industry benchmarks suggest that a successful OTT service can achieve a payback period of 3-5 years and an ROI of 20-30% or more [8].

Challenges and Risks

Adopting an OTT strategy is not without its challenges and risks for telecom operators. Some of the main ones include:

• Competition: The OTT market is already crowded with well-established players like Netflix, Amazon Prime Video, and Disney+, as well as newer entrants like Apple TV+ and HBO Max. Telecom operators will need to differentiate their offerings and value propositions to stand out in this competitive landscape.
• Content costs: The cost of acquiring or producing high-quality content continues to rise, driven by the increasing competition for top talent and IP. Telecom operators will need to carefully manage their content budgets and strategies to avoid overspending or underdelivering.
• Technology complexity: Building and operating an OTT service requires a complex set of technologies and skills, from content management and streaming to billing and customer service. Telecom operators will need to either develop these capabilities in-house or partner with experienced vendors and providers.
• Regulatory challenges: The OTT market is subject to a range of regulatory requirements and constraints, from content licensing and distribution to data privacy and security. Telecom operators will need to navigate these carefully to avoid legal and reputational risks.
• Cannibalization: For telecom operators that also offer traditional pay-TV services, launching an OTT offering risks cannibalizing their existing revenue streams. Managing this transition and optimizing the overall portfolio of services will be key to long-term success.
• User experience: With so many OTT options available, users have high expectations for the quality and convenience of their viewing experience. Telecom operators will need to invest in user research, design, and testing to ensure their OTT services meet or exceed these expectations.

To mitigate these risks, telecom operators will need to take a strategic and disciplined approach to their OTT initiatives, leveraging their unique assets and capabilities while also being realistic about the challenges and limitations they face. Partnering with experienced technology and content providers, investing in user-centric design and development, and continuously testing and iterating based on data and feedback will be critical to success.

Future Outlook

Looking ahead, the OTT market is expected to continue its rapid growth and evolution, driven by changing consumer preferences, technological advancements, and industry consolidation. Some key trends and developments to watch include:

• Continued shift to streaming: As more consumers cut the cord on traditional pay-TV services, the demand for OTT streaming services is expected to continue to grow. By 2024, it is estimated that there will be over 1.1 billion OTT video subscribers worldwide [9].
• Rise of ad-supported models: While subscription-based services like Netflix have dominated the OTT market to date, there is growing interest in ad-supported models that offer a lower-cost or free option for consumers. Services like Hulu, Peacock, and Pluto TV are leading this trend, and more are expected to follow.
• Bundling and aggregation: As the number of OTT services proliferates, consumers are facing subscription fatigue and fragmentation. This is leading to a rise in bundling and aggregation services that combine multiple OTT offerings into a single package or interface, often at a discounted price.
• Personalization and recommendations: With so much content available across so many services, helping users discover and engage with relevant programming is becoming a key differentiator. OTT providers are investing heavily in personalization and recommendation engines that use AI and machine learning to surface tailored content for each user.
• Interactive and immersive experiences: As 5G networks and edge computing capabilities expand, there is growing interest in OTT experiences that go beyond passive viewing. This includes interactive storytelling, multi-angle viewing, augmented and virtual reality integration, and other features that engage users in new ways.
• Global expansion: While the OTT market has been dominated by the US and a few other major markets to date, there is significant growth potential in other regions such as Asia, Latin America, and Africa. OTT providers are investing in local content production and partnerships to tap into these markets.

For telecom operators, these trends present both opportunities and challenges. On the one hand, the growing demand for OTT services and the shift away from traditional pay-TV create new revenue streams and customer acquisition channels. On the other hand, the increasing competition and fragmentation of the market raise the bar for differentiation and profitability.

To succeed in this dynamic environment, telecom operators will need to be agile, innovative, and customer-centric. This means leveraging their unique assets such as network infrastructure, customer relationships, and data insights to create compelling OTT offerings that meet the evolving needs and preferences of their target audiences. It also means being open to new partnerships, business models, and technologies that can help them stay ahead of the curve and drive long-term growth and profitability.

Conclusion

The rise of OTT services has disrupted the traditional telecom industry, but it has also created new opportunities for innovation and growth. By adopting OTT strategies that leverage emerging technologies such as 5G, edge computing, and AI/ML, telecom operators can create new value propositions for their customers and differentiate themselves in an increasingly competitive market.

However, success in the OTT space requires more than just technology adoption. It also requires a deep understanding of customer needs and preferences, a willingness to experiment with new business models and partnerships, and a disciplined approach to content acquisition, user experience design, and financial management.

As the OTT market continues to evolve and mature, telecom operators that can navigate these challenges and opportunities will be well-positioned to thrive in the years ahead. By staying focused on their unique strengths and capabilities, and by continuously adapting to the changing landscape, they can build sustainable and profitable OTT businesses that deliver value to their customers and shareholders alike.

References

1. McKinsey & Company. (2020). How COVID-19 has pushed companies over the technology tipping point—and transformed business forever. Retrieved from https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-covid-19-has-pushed-companies-over-the-technology-tipping-point-and-transformed-business-forever
2. AT&T. (2021). AT&T Reports Fourth-Quarter and Full-Year Results. Retrieved from https://investors.att.com/financial-reports/quarterly-earnings/2021
3. FierceVideo. (2021). HBO Max is a 'key acquisition and retention tool' for AT&T. Retrieved from https://www.fiercevideo.com/video/hbo-max-a-key-acquisition-and-retention-tool-for-at-t
4. Verizon. (2018). Verizon reports strong 4Q results while positioning for future growth. Retrieved from https://www.verizon.com/about/news/verizon-reports-strong-4q-results-while-positioning-future-growth
5. Variety. (2020). Verizon Media Launches Yahoo Play, New Free Streaming Service With Live NFL Games. Retrieved from https://variety.com/2020/digital/news/verizon-media-yahoo-play-free-streaming-nfl-1234817203/
6. SK Telecom. (2020). SK Telecom's Oksusu Surpasses 9 Million Subscriber Mark. Retrieved from https://www.sktelecom.com/en/press/press_detail.do?idx=1438
7. Korea JoongAng Daily. (2020). Streaming service Wavve aims to take on Netflix. Retrieved from https://koreajoongangdaily.joins.com/2020/12/06/business/industry/streaming-Wavve-Netflix/20201206163400407.html
8. Purely Streamonomics. (2019). What is the average ROI for a streaming service? Retrieved from https://www.purelystreamonomics.com/what-is-the-average-roi-for-a-streaming-service/
9. Statista. (2021). Number of OTT video subscribers worldwide from 2012 to 2024. Retrieved from https://www.statista.com/statistics/260179/over-the-top-video-subscribers-worldwide/