Most observers would agree that over the top alternatives are cannibalizing direct carrier revenues to some degree, though reasonable observers might disagree about the extent of such shifts of end user spending.
At the same time, most observers would agree that those alternatives also can stimulate carrier revenue, principally by increasing spending on Internet access services.
Yet others might argue that cannibalization happens, but that it is not such a threat to carrier revenue as one might think, in part because carrier text messaging is a large revenue stream, while over the top messaging is a comparably small revenue source.
The point is that the revenue impact of substitute products is complex, with some potential losses offset by indirect revenue from other sources (people need data access plans to use OTT messaging).
At least so far, text messaging is a business with direct carrier revenues two orders of magnitude greater than OTT messaging.
Informa Telecoms and Media forecasts that mobile operators will generate a total of $722.7 billion in revenues from text messaging revenues between 2011 and 2016, for example, while
third-party providers of over the top (OTT) messaging services will earn about $8.7 billion in 2016.
But Informa Telecoms & Media also has predicted that global annual SMS revenues will fall by US$23 billion by 2018, to US$96.7 billion, down from US$120 billion in 2013. The decline in global SMS revenues will largely be caused by the continuing adoption and use of over-the-top (OTT) messaging applications in both developed and emerging markets.
By region, Asia Pacific is forecast to experience the highest drop in annual SMS revenues over the forecast period, falling from US$45.8 billion in 2013, to US$38 billion in 2018, Informa predicts.
Asia Pacific is where a number of OTT messaging apps have originated, including Tencent’s WeChat (China), Kakao’s Kakao Talk (South Korea) and Naver’s Line (Japan). Much of the revenue loss in Asia Pacific will come from China, where annual SMS revenues are forecast to fall from US$25.4 billion in 2013 to US$19.6 billion in 2018.
Informa estimates that, in Western Europe, Italy will see the steepest decline in its text messaging revenues, falling to US$2.2 billion in 2018 from US$3.3 billion in 2013, representing a compound annual growth rate of minus 7.54 per cent.
On the other hand, at least some mobile operators are in position to limit losses by changing their retail packaging.
Mobile operators in markets with a high proportion of postpaid subscribers can mitigate the impact of OTT messaging applications by offering unlimited text messaging or large bundles of text messaging.
Prepaid operators in some markets also can take that tack. Scratch Wireless, a new mobile virtual network operator in the U.S. market, offers unlimited text messaging within the domestic market at no incremental change, for example.
For example, Informa forecasts that, in South Korea, where 99 percent of mobile subscribers are postpaid, text messaging revenues will decline relatively slowly over the forecast period, from US$2.51 billion in 2013 to US$2.1 billion by 2018.
This is a CAGR of minus 3.5 per cent, less than half that of Italy and despite the popularity of Kakao Talk in South Korea.
In France, where 74 per cent of subscribers are postpaid, text messaging revenues will decline at a CAGR of minus 4.1 per cent from US$4.1 billion in 2013 to US$3.3 billion in 2018.
In July 2013 and August 2013 Vodafone experienced year-over-year mobile messaging traffic declines of 35 percent in Germany and 29 percent in both Italy and Spain.
Analysts at the Yankee Group therefore predict that, by the end of 2014 more than half of all
mobile operators in developed markets will offer their own IP communications apps.
In September 2013 Optimus launched a youth-oriented service in Portugal that bundles free use of OTT apps such as WhatsApp, Facebook Messenger and BBM with traditional mobile services.
One might argue about the value of such a bundle in markets where mobile Internet access is not a basic part of a subscription, but the approach can make sense in markets where mobile data is deemed relatively expensive and the lead Internet applications are social messaging related.
In a few cases, mobile service providers also have experimented with You Tube-focused mobile service plans that might appeal to heavy mobile video users who do not otherwise have high needs for general purpose Internet access.
Some leading mobile providers, such as Orange, have developed branded OTT apps. Orange operates LiBon whileTelefónica offers TUGo.
Sprint also recently launched what it calls its “Messaging Plus” app on a white label basis using Jibe Mobile.
How successful any of the operator-branded services will be, over the long term, is hard to say. In many ways, the strategic dilemma is similar to the challenge posed by over the top VoIP. Whether a service provider competes, or not, per-unit prices, and hence revenue and profit margin, evaporate.
A clear divergence of mobile service provider opinion exists about how to cope with the over the top communications threat or opportunity. Some firms think branded OTT apps will help. Others think that will not help.
Some carriers will build their own communications apps while others will white-label
existing apps from third parties. In some other cases, mobile service providers will partner with OTT apps to provide favored access.
But perhaps half of mobile service providers either believe that is not fruitful, and will not embrace OTT messaging, or have not yet concluded such an approach is necessary.
U.S. mobile operators, for the most part, are in the latter camp, while several leading European service providers are in the former group.