Control of the value chain is a new concept for communications service providers. In the old world, where apps (voice) were vertically integrated with access, there was no question but that telcos controlled the value chain.
That is the fundamental difference between the past and the present. By definition, Internet Protocol separates apps from access. New business models at different layers are inherent in the protocol.
“Because connectivity costs are paid by the user, OTT players have great flexibility in their business models,” says Vision Mobile. “OTTs can monetize ads, downloads, analytics or acquisitions, and are thus able to price their services either free (Viber), close to free (Whatsapp), or even less-than-free (in the case of Google sharing app revenues with operators).”
The vertically integrated, “all-in-one” telco business model of bundling connectivity and service costs makes it impossible for telcos to compete with free or less-than-free OTT alternatives, Vision Mobile argues.
Skype for a time was seen as a direct competitor for telcos. Google apps have from time to time likewise is viewed as a direct competitor. Obviously, Google Fiber does make Google an ISP, and in that capacity is a direct competitor to other ISPs.
In theory, Internet access is a complement to Google, Facebook and other apps. Theoretically, demand for Internet access grows as consumption of apps grows.
In practice, most ISPs probably would see matters differently. In the prevalent view, Internet access is an input to the app business, a necessary foundation for the existence of the app business, but not necessarily a direct beneficiary of app segment success.
“As OTT players put increasing pressure on traditional telco profit centers, it is tempting to see them as direct competitors,” says Vision Mobile. “Yet, OTTs do not compete for telco service revenues; instead, they compete to control key links in the digital value chain, with business models that span consumer electronics, online advertising, software licensing, e-commerce and more.”
Connectivity is as important to the app provider business model as gas to a car. But the relationship is not necessarily symmetrical. In other words, one can prosper even if they other does not do so well.
Such asymmetric business models now are a fundamental fact of industry reality. There are many implications. In some cases, the success of any particular initiative is not measured by direct revenue, but by enhancement of the earning power of the access provider overall.
Also, even if some think telcos can compete directly with OTT providers, others would argue that is not a likely tactic.
The unknown issue is what other assets access providers control that can be monetized. Vision Mobile argues localization, user targeting, privacy controls or MVNO service customization are potential areas where access providers can create revenue.
The other big problem is that companies can get an unfair competitive advantage by breaking industry boundaries. In many cases, that means expanding into ecosystem adjacencies. So an app provider becomes a device supplier; a device supplier gets into e-commerce; a content supplier becomes an ISP or video services supplier.
That can create new business models based on monetizing in some indirect way. So Google makes money not on search, email, maps or other sales or subscriptions, but on advertising.
Amazon expects to make money not on profits from hardware, but sales of content to device owners.
Apple expects to make money not on mobile payments, music or apps, but on sales of devices that use those apps.
When confronted with the disruption of asymmetric competitors, incumbents face the choice between the decline of their business, or a grueling restructuring of their core business model, Vison Mobile argues.
The key point is that an asymmetric competitor when an asymmetric competitor enters a market, it often destroys most of the value in that market.
Redistribution of profits away from incumbents is a relatively secondary impact. The big change is that the total value of an affected market shrinks.
One illustration is that when consumers use over the top services that displace paid alternatives, some amount of usage, and therefore revenue, shifts away.
But the biggest impact is that the availability of “free to use” alternatives actually shrinks the size of the former market. Not only does some market share shift, the market itself shrinks.
Service providers hear all sorts of advice about “what to do.” Much of that well-intentioned advice will prove impractical, ineffective or successful, but not at magnitudes that really make a difference.
So far, it is questionable whether any major incumbent really can claim to have found a viable and sustainable model to survive an asymmetric attack, except by expanding into new lines of business.
Ultimately, that might be the only sustainable answer: legacy markets have to be replaced by new markets and products. There might not be a sustainable way to counter a direct asymmetric attack on a legacy market.