Understanding OTT - Why Carriers dislike BBM, hate iMessage and fear Skype (updated)

I was just speaking in the Netherlands doing a keynote at the Mobile Convention. As I was in town, the news broke that the local incumbent fixed and mobile operator, KPN, was laying off 5,000 employees in an austerity measure, and simultaneously, Carlos Slim's America Movil was making an offer to buy about a quarter of the company. KPN has significant telecoms presence in several European countries like Germany and Belgium. America Movil is the giant telecoms giant out of Mexico, and Carlos Slim is obviously the richest man on the planet. Why would this be relevant to OTT, Over The Top business? Because KPN was the first major telecoms operator to report a significant decline in its core SMS text messaging business, that drives more than half of the profits for most European mobile operators. KPN made that announcement a year ago. Since then they have had disappointing market news quarterly, and their share price had fallen so much, that clearly Carlos Slim felt they were a good value in terms of a step into the European telecoms market.

GET DOWN WITH OTT

With that, rather clumsy intro, lets look at OTT. What am I talking about. I'm talking about BBM, Blackberry Messenger. I'm talking about iMessage and Facetime on the iPhone. I'm talking Google Talk, MXit, Whatsapp. And of course I'm talking about Skype. Over The Top providers will offer bypass services, typically for the most profitable parts of the telecoms business, via apps loaded to smartphones. If you want to save money from your SMS messaging costs and you have a Blackberry, then use BBM. If you have an iPhone, then its the iMessage. In those cases, your friends will also need to have the same service that exists only on that same platform. Or if you have friends with different smartphones, you can install Whatsapp, and send and receive mobile messages free, shared with any friends who also have Whatsapp. 

Skype we all know, we can do free phone calls via the internet, in addition to the messages, and we can also do videocalls over the internet. All free.

Consumers love OTT services, obviously. And businesses like those savings too. But the telecoms operators hate them. And then the hatered comes in flavors, depending on who it is and what they do.

OPERATOR ECONOMICS 101

So lets look at the very basics of telecoms operator business. In 2011 the mobile industry earned 1.3 Trillion dollars. Most of that was not the costs of our handsets or other 'hardware' such as the telecoms networking infrastructure. Most of the business - 77% of it actually - was on the services side. Most of that 1.0 Trillion dollar service revenue pie, went to the telecoms operators. And of their income, 65% came from voice calls, and 19% came from messaging. So out of the total mobile telecoms revenue pie, 84% came from voice and messaging. That a large share for essentially just two services.

But more important than revenues is profits. Roughly speaking 50% of global mobile operator profits came from voice calls, and 45% came from mobile messaging. So voice and messaging generted 84% of revenues, and 95% of profits for the mobile industry's biggest players. Now you see? These are truly the 'cash cows' that keep the industry alive. A dramatic threat to either one of these two services would be a catastrophic menace to the very survival of the mobile operator involved. If anything were to actually jeopardize both voice and revenues - that would be the existential threat to the very industry.

UPDATE - May 12 - AT&T CEO Randall Stephenson was interviewed at NY Times. He says he stays awake at night because of OTT services like iMessage. (So I'm not just making this stuff up, it really is an existential threat here we are discussing. OTT services are the biggest headache for mobile operators/carriers worldwide)

Now the rapid rise of iMessage or Whatsapp takes a brand new meaning. It is nice for us consumers to make calls on Skype but the revenue and profit drain is enormous. Lets now look a bit at recent stats reported about the OTT business.

WAY, WAY OVER THE TOP

The UK is a highly competitive telecoms market with many similar-sized real network operators, and also many viable and sizeable virtual operators (MVNOs) and a market where voice call tariffs and SMS messaging tariffs tend to be among the lowest in Europe. The bundles to get big buckets of free voice minutes or messages are plentyful on all networks. Roughly speaking half of the market is with prepaid customers and half postpaid accounts. There are both subsidised handsets and unsubsidised handsets. There is no dominant domestic player and unsually for most markets, the past national monopoly service, British Telecom, sold its mobile asset, so there is no dominant major legacy player with both a fixed and mobile network to run. The UK has been near the lead in most of the major technical and user-adoption issues for mobile, an early indicator market for Europe and considered one of the more advanced mobile markets also globally. The UK is a very good test case for many mobile matters. A test laboratory, if you will.

We just heard from a survey by MyVoucherCodes of the UK's OTT market. 81% of British mobile phone users have installed an app for at least one OTT service. Four in ten UK mobile phone owners with an OTT service, have also shifted away messaging traffic from traditional SMS, either partially or completely. That means 33% of the total mobile phone user base in Britain.

One third of British mobile phone owners has not only installed an OTT app, and uses it, but likes it so much, they have already shifted part or all of their messaging traffic away from SMS. That is massive. Remember, 19% of mobile operator revenues and 45% of profits globally come from SMS. And in Britain already today, a third of the user base is shifting or has shifted away from this vital piece of the mobile operator business, sapping revenues and profits.

The even more damaging part of this evolution is, that the shift is most rapid and most complete, with the heaviest users. The youth. The heavily travelling. The expat foreigners. Those who used to generate a disproportionately large volume of the total messaging traffic (and revenues, and profits).

How big is the damage overall globally? Ovum measured for 2011 globally and found OTT cannibalization of lost revenues to mobile operators out of text messaging at 14 Billion dollars. When the remaining real SMS market was worth 126 Billion dollars, the theoretical revenue pie would have been 140 Billion. And messaging OTT provider have thus cannibalized about 10% of the total global revenues of SMS text messaging. How rapidly did this threat emerge and materialize? I count the start of mass-market OTT service in mobile from the year 2005, when Blackberry Messenger started to be adopted in many markets by the youth. So in the next 6 years the cannibalization of SMS revenues and profits has gone from zero to 10%. And if we project a standard S-curve to this number and the past 6 year growth pattern, we get the cannibalization level at about 20% by the end of this year 2012.

BAD BADDER BADDEST

Yes, I know thats bad English. I just like the Badness of it all. This is a blog, I can be a bit more casual with the language, get over it. But yes, lets look at a few of the OTT providers. The UK survey by MyVoucherCodes revealed that the biggest OTT provider in Britain is iMessage which is used by half of all who use OTT services. Blackberry Messenger came in second, used by four out of every ten people. Whatsapp had 37% and Skype 33% of UK messaging users who use OTT services. Kik was ranked 5th at over a quarter of all OTT users.

UPDATE May 11 - I have just spotted US stats to help further understand the market

A day after this blog went up, I found a US survey by Acision, which says that of US messaging oriented OTT services installed specifically on smarpthones (remembering that OTT apps also often are available on mid-range featurephones) Acision measured the US adoption rates among smatphone users as follows: Facebook 37%, Skype 17%, Twitter 17%, iMessage 11%, BBM 10% and Whatsapp 5%. And similar to the UK finding, most who use SMS have not stopped doing so even with OTT services. In the USA, even among smarpthone users, 91% send SMS regularly and 45% of smartphone-owning SMS users, (and many in this group even while having access to OTT provider solutions) say they would be lost without SMS. I should point out, that the survey was commissioned by a mobile messaging provider (Acision) but the survey size was significant at 1,000 US mobile phone owners. There is tons more data and findings about US messaging users both SMS and OTT in the survey, which was reported at Mobile Enterprise 

BIG REGIONAL DIFFERENCES

The OTT market is still quite fragmented and there are many regional or local players. The domestic market use of OS brand-specific OTT providers, iMessage and BBM specifically, depends very strongly on domestic penetration rates of that platform (iPhone, Blackberry) in that country (and specifically among consumer users when we consider Blackberries). iMessage is big in France but nearly invisible in India. BBM is nowhere in China but huge in Venezuela. And so forth.

So if we want to consider the level of fear and loathing from the side of operators/carriers, then there are roughly four levels of threat.

First there are the small players and regional players. These are certainly a threat, and in some markets - take MXit in South Africa for example, they can be a huge disruptive player. But globally, a carrier group would rate them still as the least dangerous threat.

Secondly come the OS specific platforms, specifically currently Blackberry Messenger and iMessage. Blackberry has some 75 Million users worldwide, so it is less of a threat than iMessage, which reaches about 150 million users of iOS devices, not just iPhones but also iPads and iPod Touch devices.

Third are the global cross-platform messaging companies, specifically currently Whatsapp. While the user number is still less than BBM or iMessage, Whatsapp has the threat to be on all smartphone platforms breaking past the barrier of one OS family. The global installed base of smartphones is over 900 million today (plus you can double that easily, if you add Java/Brew capable 'featurephones'). But still, Whatsapp has a long way to go to approach anything near that large a number of active users.

Fourth, and on the top with Over The Top, is one and only one: Skype. Skype has over 900 million users today, so just by virtue of being the biggest, it is the biggest threat. But where most OTT providers are single-service plays (mostly on messaging), Skype is a triple threat, doing voice calls, messaging and videocalls.

 

METCALFE'S LAW

 

And now we gotta come do some math. Don't worry this is not going to hurt. But telecoms operator staff tend to be engineers and they love their math. And they all know Metcalfe's Law. Metcalfe's Law is a law about communication networks. The law says that the utilty of any network increases in the square of the increase in its users. When you double the network use number, you increase the network utility to all users, not by double, but by quadruple (2 times 2, or in math terms, '2 squared' or 2 to the power of 2). So if your network user number grows by 3, the utility to all users grows by 3 x 3 = 9. This now gets interesting.

According to pure user numbers, iMessage is roughly twice (when measured by number of current iOS device owners, not necessarily active iMessage users) as big as BBM. But according to Metcalfe's Law, iMessage is four times as dangerous to carriers simply as a network to transmit messages.

What about Skype? It is 6 times bigger than iMessage (ie 36 times more dangerous) and it is 12 times bigger than BBM (ie 144 times more dangerous).

You notice how this gets frightening really fast. If carriers/operators 'disliked' BBM and tried to stiffle its growth, they honestly fear iMessage and are doing all they can to prevent its growth. How then would they react to Skype? Pure terror might be an appropriate term for their spontaneous unprompted reaction, I would say. 

And hey, that is Skype today, before Microsoft gets into bed with them. Now Microsoft is promising to integrate Skype into all their platforms, starting with Windows 8. Soon it will be on Xbox360 and on Windows Phone etc. Take you 900 million current active users, and add in 1 Billion Windows desktops. Yes, there is bound to be significant overlap, but even if we say the resulting Skype plus Microsoft juggernaut comes out at 1.5 Billion, that is 10 times bigger than iMessage - yes, not 36 times more threatening as Skype is today, but yes, 100 times more a threat when powered by Microsoft.

Thats just messaging. Messaging which delivers 19% of operator revenues and 45% of operator profits. Skype also kills voice calls where 65% of revenues and 50% of profits are today. And finally, Skype also destroys the future, because it cannibalizes consumer videocalls, something operators/carriers wanted to be a future revenue and profit stream in the 3G and LTE networks, using smartphones with the second, forward-facing cameras.

For whatever dislike, mistrust, fear and hatered any mobile operators have for BBM or Whatsapp or iMessage, that is simply exponentially more towards Skype. And I have not even started about the role of international calls and international call roaming to the profits of the mobile operators. Skype is like a guided missile, aiming for any place where a mobile operator has its best profitability.

THE EMPIRE STRIKES BACK

So how is the carrier community reacting. Any operator can react to low cost or cheap or free voice or messaging provider, by the obvious marketing tool - cutting its own prices. The operators tend to not lower their main public price for the voice minute or SMS text message, for example, but rather they use other methods by which they can focus the damage, for any price cut means directly a cut in profits too. So they give big (or ever bigger) bundles of free calls and messages at some price plan or point.

Then the operators try to set up something similar. For Skype VOIP calls and various Skype clones like Vonage, the operators have already been deploying VOIP based discount call services, such as those used for international calls. Typically you would need to dial some special prefixes on that operator's network, to access those cheaper VOIP technology based international calls. And on the messaging side, some operators have been starting to roll out clones of OTT messaging services like Whatsapp. In the USA, T-Mobile launched Bobsled, while in Spain, Telefonica has launched Tu Me.

And of course the operators also try to limit, cripple, shut down or charge extra for uses of those services, just like TeliaSonera in Sweden is now doing for Skype. Their (new) contract terms say their unlimited data plan explicitly excludes access to Skype and if Skype is used, those data charges will be above the standard all-you-can-eat package.

LEAST THREATENING OPTION

Now we are approaching the point where operators are making those hard choices. The actual decisions depend very much on what is in their home market, what kind of smartphone platfroms are popular etc. But consider for example BBM and iMessage. Clearly both are undesirable for the operator. But consumers want smartphones. Which one to support in marketing terms (from in-store promotions to handset subsidies)? So first, iPhone is already bigger by reach than Blackberry. But when you add the global iOS family of product to the iPhone side, and the few sold Blackberry tablets to the BBM side, you get a very lopsided picture, the reach of iMessage is far bigger. Then lets add data loads. A Blackberry often has a smaller screen, it is less optimal for web surfing, they are very well suited for messaging which has a trivilal data load footprint compared to modern web content like YouTube videos. Then compare to iPhones. They have excellent data consumption elements, a large screen, great intuitive browser and typical Apple goodies. And for messaging, an iPhone with its touch screen is never gonna beat a Blackberry QWERTY keyboard. Remember the UK stats, for most users who have installed OTT messaging services, they don't quit using SMS. So having a good messaging phone will increase the traditional messaging traffic versus a bad messaging phone. 

So an iPhone causes heavy data loads and is not causing increased messaging to the same degree as a Blackberry. Meanwhile a Blackberry has on average less web traffic but has far higher uses of messaging, both on BBM and on SMS. Then add the data compression which on the Blackberry solution is far better than any other smartphone. Finally add BBM and other Blackberry data plans, with most Blackberries, there is a revenue opportunity for the operator already built-in on BBM, which Apple of course does not give to the operator. On all these things, while yes, operators hate BBM too, the overall Blackberry package is far far less harmful for the operator total business, than an equivalent iPhone.

The same goes for Whatsapp, and yes, for Skype. Whatever option is out there, Skype is literally the most dangerous, the most harmful and most threatening. That is why carriers hate Skype above all others. That is why when Microsoft bought Skype, they were faced with an instant, global sales boycott of all Windows Mobile and Windows Phone smartphones - even as these did not come with Skype pre-installed. The carriers know that VOIP and OTT messaging are inevitable. But Skype is not inevitable. They will fight Skype till the last minute and message and videocall. And mark my words, the operators win in this game. We've seen this movie before. Nokia tried to bypass carrier services and make revenues for itself with something called N-Gage. The carriers said no you don't. Nokia's market share had a severe drop globally from 40% of all mobile phones to 24% and Nokia went back to the operators, apologized, and immediately ended the N-Gage app store with its side-loaded games and operator-bypassing software sales. Why could Apple then do it successfully? Its the Blackberry vs iPhone problem of today. When Apple launched the iPhone App Store in 2008, they were tiny in smartphones, only 10% of all smartphones and 2% of all phones sold. They were not a threat (then, they are now). Unfortunately it seems that Nokia's Stephen Elop has managed to fire or scare away all the senior management talent who knew the N-Gage story, as Elop clearly has not learned this lesson. As Churchill said, those who fail to learn from history are doomed to repeat it.

And if you think the carriers don't have this kind of clout anymore, ask Apple last year. Apple thought the iPhone loyalty and fan support is strong enough, that Apple could deploy a virtual SIM card to the 2011 new version of the iPhone (what later became the iPhone 4S). The carriers said no. Apple lost four months of sales, had to rush a redesign of the iPhone 4S with a real SIM slot and the carriers won. They won against Apple. Who wins against Apple?

And if you are a Microsoft fanboy, what of Microsoft then? The carriers promised to launch the Kin youth phones, Microsoft's first phones ever (two years ago). Then they didn't like Microsoft's arrogant bullying tactics, and after they took the marketing launch campaigns, and the phones hit the stores, they stopped supporting them. Microsoft pulled the Kin phone from the market - in six weeks. The shortest life of any phone ever created. Yes, the carriers have this power. They used it against Nokia when it was biggest in handsets, they used it against Apple when it was biggest in smartphones, and they have used it against Microsoft specifically, even before Microsoft angered them totally, with the purchase of Skype. Now the matters keep getting worse for Microsoft (and Nokia Lumia) as we just learned yesterday, that Nokia CEO had been telling the Nokia shareholders how dramatic world domination plans the Axis of Evil (Skype + Microsoft + Nokia) now have. But read that blog to hear the Nokia story, this blog is not about Nokia, this is about OTT platforms and why carriers dislike BBM, hate iMessage and fear Skype.

For those readers who might want to know more explicitly about the danger Skype poses to mobile operators, I wrote a blog about that last year. This is far more detailed and specific, and obviously only about Skype. Read: Why Do Carriers Hate Skype: Let Me Count The Ways.

OUR PREFERENCE IS NOT THE ISSUE

Please note, I am here to explain how carrier business works. Obviously for us, normal people, consumers, the OTT services are excellent and help drive innovation and lower costs. Those are all good things. I am not in any way suggesting OTT is not coming or will not take over for messages and calls. I do want my readers to understand why there is such a big difference among the OTT providers, and why the carriers are so nervous about this matter. As I mentioned, MY PROJECTION says 20% of all messaging revenues is going through OTT within a year, doubling from what it is today. I am not in any way suggesting we try to go back to a previous decade haha.. I am not saying what we want. I am saying what the operators/carriers think, and they decide which handsets are in the stores and which are sold to their customers. Thus the carriers control this situation. And if Microsoft were, for example, to put a premium price Skype on Windows 8, where the calls are not free, then nobody would use that, they'd go to free alternatives, obviously. So the purpose of this blog was to answer the question from many on this blog and on Twitter, who asked me to explain this part of the telecoms economy and competitive landscape. I am not here to defend carriers or suggest OTT should or even could be eliminated. What I AM saying, is that the carriers have power to pick one over another, and in that contest, Skype is already doomed.. 

WHO IS THIS GUY?

Oh, and those who ponder who is this silly Ahonen with his weird views? I'm the most published author in the mobile industry with 12 books out already and explicitly, I wrote the industry's first business book, how to make money with mobile (M-Profits a multiple bestseller, translated etc). In that book I discussed this opportunity and threat - literally 10 years ago - so I didn't discover the OTT issue with iMessage last year or BBM a few years ago, haha. Before I worked at Nokia, I was employed at Elisa Corporation (Finnish carrier/operator) in the 1990s. and as the head of our international products I oversaw our trial of an early VOIP service in 1997. I've been personally actively involved in the BUSINESS of this opportunity for 15 years, literally, and written 'the book' about the mobile carrier/operator business. If you think Tomi is a weirdo, think again: I am referenced in over 120 published books already, by my peers. If you think my thoughts here are weird, the real experts of this industry - the ones who write the books - they trust me. You might consider re-reading this blog with that in mind.. And I'll be here in the comments to chat with you too. Just remember my rules of comments on this blog - don't be rude to my readers, stick to this topic of this blog article (you must illustrate in your comment that you read the full article else I remove your comment as a waste of the time of my readers) and don't use profanity. I also remove spam and some obvious troll comments but you don't have to agree with me, I keep very hostile comments here on this blog critical of me and calling me mad etc. Thats all fine, I will be here ten years later after another 10 books and those comments will be very petty by then haha..

Comments

[Sander van der Wal]

While we are talking about The Netherlands, the Dutch First Chamber of Parliament has just ratified the new Network Neutrality Law. Which means that practices like throttling specific network traffic, like Skype, is now illegal in Holland, like it was in Chile before that.

Changes are other EU countries are likely to follow, and this will impact the possibilities of operators to charge Over The Top for their services.

[Lasko]

I wonder why social networks like Facebook or Google+ are never seen as a threat, but Whatsapp and alike are. Facebook has a multiple of users and although I have no numbers on this, I do find that there is acutally a shift from 'traditional' communcation like text messages and phones calls to social networks.

One does no longer send out messages or calls his friends in certain situations, he just posts on Facebook. This is aggravated by the fact that social media is usually one-to-many, whereas messaging and phone calls are one-to-one. So a single message posted on Facebook is not a single text message lost, it is 10, 20, 30 messages lost.

With Facebook having an established base of nearly 900 million people and Google+ growing at fast rates as well - and both already having video calls and possibly integrating it into their mobile environment - they are for sure a threat as large as iMessage, BBM, Whatsapp, and possible Skype, too.

[Bill]

Tomi you an be such a 90's telco guy sometimes that it makes one wonder if you ever came to grips with the internet and all it entails. Here is a copy/paste comment for you taken from ZDNet:

"freakqnc 1 day ago
It should be clear by now that carriers are the problem not the solution or innovation. They are what's most hindering to mobile tech progress and all that it would go with it. With ever more powerful smartphones, with a growing infrastructure that could leverage many innovative ideas to lower the cost of wireless communication including what companies like republic wireless or Keywifi, and more, making those ideas non-profit driven, but partecipatory and shared. That way the community of wireless and wifi users would share their resources turning them into part of an infrastructure that will become the network itself.

Carriers are aware of alternatives and they know their unsustainable business model is absolutely atavistic and survives only becaise the majority of people are noe savvy enough to represent a massive market-hurting potential. Also they own still exclusivity on physical network both wired and wireless and wouldn't let any independent 3rd party enter the game to disrupt their thightly controlled highly profitable business model.

The current network service is pretty crappy when it comes to call quality... Skype could allow much higher quality and become a threat by making people realize how sub par their cell voice service is. Once subscribers will start to value voice quality on calls, then the cat will be out of the bag for all carriers who will have to start deliverying and will no longer be able to offer crappy service for top dollar figures.

When 3G came out all data were on 3G and voice was managed on older 2G etwork... this is still true since 4G is not deployed and available to the point that 3G can be dedicated to voice only. Even if that was the cases carriers would not use the larger bandwidth of 3G to offer HD voice services, but they will jam in 3G badwidth more voice users than they could do before and they'd start selling cellphones to toddlers if they'll be allowed to. I am not being harsh on carriers, I just know that's how they work. Also the low quality of voice is kept as is because according to studies people tend to talk longer when the signal quality is higher... that would increase network load for voice which represents a tiny fraction of profitability since now the name of the game is charging for data hogs. There's more money to be made on data than voice traffic. If it was the other way around you would see the raise of HS voice paired with unlimited data plans... that is not nor won't be the case

Then there is the insanity of pushing ever faster speeds where carriers make subscribers pay through their nose for handset with 4G capability (yes I am referring also to the expensive mandatory data plans too in the case of subsidized phones). The overcharging for 4G it's unjustified at the handset level other than it's priced like that because is a "novelty" in US and it's a mostly a marketing gimmick because when considering increased speed what's that good for when carriers will charge an arm and a leg for data usage and there are no longer unlimited data plans? All that's available are expensive few GB/mo plans which one can now burn through at faster rate to reach overages even faster than ever before! So where is the advantage driving a ferrari on the autobahn when all you're given is just a 2~4 gal. of gas and to drive further you'll need to sell your house? (so if you rent you are sheer out of luck ;P)

Not to mention that they continue to scam money out keeping voice, SMS, email and data as separate service... there is no such thing as a difference between voice and data service... it's all digital data! And they keep making a killing on that scam.

New smartphones can shoot at 1080p then if you want to upload your videos to any service where they can be stored or shared from, then you better wait to get back home and use your internet connection, because with the average 2~4 GB allowances on $50+/mo. that's barely enough to transfer 2~4 hours of HD recorded video at most... after which you would of course be left with no data service unless paying overages. That's a great business model for carriers, not wireless subscribers.

They will cry poverty each step of the way claiming they have invested so much in new infrastructure and service, where in reality it's been a fraction of what they've overcharged people for services that remain unjustifieably separated only for the purpose of create the perception that they actually are different and it's OK ti be charged for SMS voice and data service separately.

But this is no news, we've known for a while already that overcharging for data and pushing to consume data even faster it was where it was heading http://gigaom.com/mobile/its-official-voice-is-worthless/ Does anyone really thinks that 4G LTE was pushed because the carriers wanted to give faster service to the subscibers so they would have a higher quality of service? LOL! Sure that would be a side effect, but the real reason was to set a low threshold and have subscribers eat through data allowances quickly so carriers can either hit them with overages or make them move to more expensive data plans."

[JJ]

Thank you, Tomi!
I really enjoyed reading this blog (again) and learned a lot of about OTT.

[Nifty Future]

if you want to upload your videos to any service where they can be stored or shared from, then you better wait to get back home and use your internet connection

[Louis]

@Lasko: Good question, seeing as Facebook actually has a purpose-built texting App for the iPhone.

@Tomifan: Missing here is ten macro picture, especially in Europe. Operators have two sources of competition that are new: from the Internet, as described here, but also from each other. The EU forces them to be compatible, to port numbers, and soon, not to discriminate by traffic type. Combined with improved Internet-based apps, this will force network traffic to be sold at the market clearing price.

Of course, missing from the picture is that this will be very very profitable (like selling petrol), but the days of charging thousands of euro per megabyte of SMS traffic are over. (And, because of the many options for consumers in the EU, this is independent of the winning app for voice or messaging.)

[AtTheBottomOfTheHilton]

I think the carriers are the ones who are stuck in the 90s and while technology have moved on. It's called globalization and people no longer accepts being ruthlessly robbed just because they make toll calls over country borders. All recent companies I've worked at urges they workers to use Skype instead of traditional phone calls in order to cut costs. It is the price of the international toll calls that are the problem, not Skype. Skype is an invention to overcome the high costs of global communication.

We have another example, where EU put a limit on how much cell phone calls can cost if you call from abroad. This price is still ridiculously expensive and a cash cow for the operators. It's like if you call from Texas to California, the operator would charge you $1 per minute.

Basically, Skype is an invention that prevents you from getting robbed by operators and the operators can dislike Skype all they want but since the price for international calls are that high, people will figure out ways to overcome it.

[Lasko]

It is actually quite funny that almost everyone seems to have the inevitable feeling that they are beeing 'robbed' by their operators and that it is their god-given right to call and message practically for free, because almost noone seems to understand that
- creating and maintaining a network costs money, a huge amount of
- providing bandwith and peering with other operators and the internet costs money, a huge amount of
- subsidizing your phones costs money, a huge amount of

Where does your internet connection come from you are VoIP'ing and texting over when you've stopped your operators 'robbing' you?
There is no such thing as free beer.

[Lasko]

There is actually quite a huge difference between an OTT app and the tight integration of Skype as planned by Microsoft: convenience.

I also have a Skype app installed on my phone, but I barely use it. Why? Because opening the app, connecting to the Skype network, digging through the contact list, and having the application opened for the remaining day just to be able to call and to be able to be contacted is just not as convenient as just pressing the green button.

A tight integration into the operating system and native applications and Skype beeing possibly completely transparent to the user is a huge mutliplier for its use and it clearly distincts Windows Phone 8 Skype from any Skype for iOS app or Skype for Android app.

[vladkr]

I would like to share a personal experience about using Skype for international calls.
I live in Canada, where international calls (any calls actually) are stupidly expensive if compared to other countries.

Skype is a good alternative to call my family, my friends who live in Europe, but the fact is that Skype on Canadian 3.5G networks is just rubbish!

I don't know if my operator (Rogers) voluntarily limits rates for Skype, or if its network is originally slow, but it's almost impossible to make proper VOIP. As a result, if I have to call, I use my operators voice network; it's expensive, but at least, I can hear the person I'm calling and (s)he can hear me.

In another hand, my family enjoys unlimited plans for quite a reasonable price (20 Euros/month unlimited calls to 40 countries, unlimited SMS, MMS...)
That's actually Bouygues Telecom's answer to Free Telecom's offer.

So, we use Skype less and less now.

Can these kinds of offer reduce OTT's attraction? I think so, as I think it's easier to just dial a number than create an account, activate 3G/4G, connect, and make a call through OTT...

But that's my point of view. OTT are cars, networks are roads. You can use your own car instead of operator's buses, but If operator decide to raise toll prices on their road, what can you do against it?

So to me are a threat, but operators will always have the last word. MS took a great risk buying Skype.

[Tomi T Ahonen]

Hi Sander, Lasko, Bill, JJ and Tomifan

Sander - very good news, thanks and yes, that will impact the operators, and I'm pretty sure similar legislation will spread all over

Lasko - good point and actually yes they are. And a social network like Twitter in particular is seen as a threat like this, but again, these are at a lower level of threat for many reasons, but you are right, they too are a threat.

Bill - I hear you, I really do. I started my career on the internet side, at the first ISP of the East Coast USA, so I really saw the internet from its birth. And then I was in Finland where our operator/carrier did some of earliest internet premium services and then my first job over at Nokia was dealing with the internet on mobile. I do understand fully what you talk about and I do believe in that vision. The difference with that text and my day job, is that I don't live in a fantasy world where money is magical. I live in the real world, where money needs to be made now. So that is, in mobile telecoms still today, in 2012, mostly SMS and voice. Then its MMS. Your vision is relevant perhaps 5 or 10 years from now and I hear you laughing, you say its in 2 years - I mean globally and no, in 2 years Africa will not be all internet...

So I don't disagree with that at all. But my job here is not to peddle fantasies about what the future might look like. I help people make money now, today, in May 2012. I deal in hyper-reality and am driven slavishly by the numbers. That means voice, SMS, MMS today (in mobile). In the near future it means ads, some media content etc, and later in the decade, even apps will be a healthy revenue and profit-generating slice of the industry.

JJ - thanks! Happy you enjoyed it.

Tomifan - haha, well, maybe that can soon be over. I may be deluded, and if Nokia Lumia sales take off well into the Christmas season, I might be forced to change my mind, right? Or else, maybe inspite of being paranoid, someone might still be after you. Maybe inspite of it all, I am right. Then Nokia will die or split up or transform soon anyway, and you and I can move to more productive discussion when Lumia boycott is only a distant hazy memory on some cool night over a nice glass of whisky haha..

Keep the comments coming, I'll return with more replies soon

Tomi Ahonen :-)

[Bob Shaw]

Tomi:

I don't know where you stand on the following with regards to the carriers:

1. Disproportionate charging by the carriers for use of voice and SMS service compared to the use of bandwith.

2. Obstructing the evolution of VoIP technologies by the carriers.

3. Bundling of handsets with data plans thus discriminating against the users who bring their own unlocked devices.

[Dopey]

Wasn't the operator boycott against Club Nokia rather than N-Gage? N-Gage saw such modest commercial success in the beginning that it was hardly worth a boycott.

[Walt French]

Those of us who followed the Danger/Kin story a bit closer would NEVER have said that the carriers killed it.

It was dead before it was offered to the public.

Microsoft utterly mismanaged the project. Took a viable product OFF the market, spent two years Microsoftizing it. They denied one of the basic tenets of software — the lessons from “The Mythical Man-Month” — and let it get ground into mush by turf wars, etc. Finally, in desperation it was re-released as a buggy, incomplete mess, to a public that had long since moved on from the idea that a feature-phone was cool.

Carriers in the United States *DO* have lots of power, thanks to their government-sponsored oligopolies. And yes, they *DO* like the profits from SMS and any other way they can get them. But they also know they are fighting a derrière guard battle. Probably first in the EU thanks to a Competition Commission with some teeth, and eventually elsewhere due to capitalistic opportunism of the WhatsApp/KakaoTalk/iMessage/Skype sort, SMS profitability will shrink.

PS: one very user-friendly feature of iMessage is that the user needn't know whether the recipient is on the network or not; it'll bypass SMS if the recipient is on iOS (or soon, logged in over the web on OSX and maybe other platforms?). Built-in notifications, too; an iOS user needn't, as Skype stunningly requires, to be running the app.

[Louis]

@Lasko (and by extension @Tomi): It is almost like the operators are robots who never interacted with people.

"It is actually quite funny that almost everyone seems to have the inevitable feeling that they are beeing 'robbed' by their operators"

Several obvious responses:

1. In the US, AT&T is reporting 40% margins, so this is consistent with lack of competition.

2. Let's assume that elsewhere, competition has brought the TOTAL cost of using a smartphone to the market clearing price. (Not sure I believe, but whatever.) Fix it to be 1.

Now, there are two extreme ways to possibly ask for this: (A) a predictable amount of money based on total bandwidth usage, which is 1/12 every month; (B) 0 cost for 11 months of the year and 1 in a randomly chosen month.

You and I know these are exactly the same, but (B) makes any normal person really angry. The point here is that the operators basically use a variant of (B), with different scenarios for calling and messaging billed wildly different prices.

What the OTT services are providing is not free-ness, but cost certainty.

So to address "[Skype] is just not as convenient as just pressing the green button"

Maybe maybe not (on my phone it integrates with the address book and runs in the background), but even taken as read, the operators trained frequent travelers and expats to use it with their wacky pricing scheme. The way to kill Skype is either: embrace it; copy it; or just rationalize pricing. Done!

[cycnus]

@Tomi,

You should create Tomi Virtual University.... LOL
Thank you for this article and all other article.
I learn a lot from Tomi Virtual University.

@Bill, @TheBottomOfHilton, @Lasko

Do you know how complex and expensive running a carrier.
You need to get the license (expensive, time consuming, and also difficult)
You need a technical support within a couple of hour drive to the most remote area (expensive)
You need another technical support to handle chaos such as broken fiber optic link (expensive)
You need a backup route (redundant) to the same site.
etc....

@vladkr

That because the one who control the last mile always win... lol....
In Indonesia, in around 1999 - 2002, there were a surge of VoIP company. I believe it's around 60+ selling cheap voip card. The phone company seems struggle at first, but suddenly, the fix line phone company announce they have special number, and you don't have to buy the prepaid card, it will included in the bill (easy of use), and all other phone carrier also do the same. and all CHEAP VOIP card die miserably.... Moral of the story... if the OOT can offer cheaper product, why the one that have the infrastructure and more money can't???

Another thing I observe is BBM. When BBM start to eat carrier profit, the carrier fight the BBM with the CHEAP SMS for the mass. Of course it's still more expensive than BBM, but all the BB user still need to send SMS to non-bb user, so making the use of BBM not really cheap, since it would be cheaper for them to use all SMS instead.

I also know in Singapore, the free minute from carrier in post-paid account is for the whole world. You can use it to call local singapore number and all the world. I don't know the detail on which country is included, but because carrier is the last mile, they kill the cheap VoIP when trying OOT on them.

One more thing. In carrier, there were a PRIORITY when handling the traffic. Voice is the first, SMS the second, data the third. So, when in dense area, if the voice traffic is high, data might be suffering, and carrier can say "maybe the traffic in that area is high at the time you were skyping". The thing is, the best voice quality is always the one from the carrier. the voice quality from OOT is unpredictable. So it's not good for business people.

As for me, I also use skype when traveling aboard, and mostly use the public wifi (in hotel) to call home freely. I know the carrier and hotel hate me :).

[Bob Shaw]

Tomi_ There is a general feeling that consumers are getting ripped off by carriers on voice and SMS charges. The charges for voice and SMS are dispropionate to the use of bandwith. It is not surprising that the carriers are making upto 95% of their profits from voice and SMS.

The beneficiary of the Skype + Microsoft+ Nokia are the consumers. I hope you also lend your voice on the side of consumers who are getting ripped off by the carriers and support Skype + Microsoft + Nokia.

[cycnus]

@Bob Shaw

You don't go to a five star hotel and arguing that the cost the burger is only a bread and a beef, and it's ridicules to charge it 10 times the price of mc donald.

I also use skype, but I think tomi got a point here, that even though voip can't be avoided, the carrier will fight it until the last moment. It's like when you own a restaurant, and someone using a cart sell the same food, same taste as your restaurant but only 1/10 the price. will you fight, or jump from the bridge? (in analogy that carrier have expensive equipment, maintenance, etc, but skype only create a tool gate in front of their infrastructure).

[Bob Shaw]

Cycnus:

I am not sure that your example of burger is quite appropriate here. What we are seeing here is the carriers misusing their power to suppress the use of new technology that would benefit the consumers. The carriers need to adopt their business model to take advantage of the evolving technology.

Technology is like flowing water that is eventually going to find its way to the consumers despite all the resistance. The current business model of the carriers whereby charging the consumer ridiculously high amount for use of voice and messaging that use only a very small amount of bandwith is not sustainable. It is going to get disrupted by VoIP technology with or without Skype.

[cycnus]

@Bob Shaw

I understand you clearly. If you read my reply to vladkr, you'll know that in Indonesia the carrier already evolve past the US, the SMS is cheap, and the phone call rates is one of the cheapest in the world because they fight against VoIP provider. I'm just saying that carrier will fight against it with teeth and claw.

And please also remember that Microsoft is the evil empire. I know this, microsoft have ruin my fun... I love OS/2, microsoft destroy OS/2. I like Netscape, and don't like IE, microsoft destroy Netscape (the company), I like Nokia phone, microsoft destroy Nokia.

Just as tomi said, microsoft is not someone to be trusted. They evil, they liar, and they bully, watch sendo, motorola, sony-ericson.

So, it's natural the rejection against microsoft is high. and btw, tomi just writing what he believe it is. and it turn out to be true, that elop admit it. if you were in carrier business and almost fall for Nokia-MS (almost sign the deal), you should stop and think before sign any agreement with Nokia-MS.

What I'm saying is, it turn out tomi is right about this. This is not just a pure luck guess. Tomi is showing his talent, and we all should be grateful that we got all this information for free.