Why OTT "Zero Billion Dollar" Markets are Rational

What has the Internet done to markets over the last 20 years, including telecommunications markets?

Impact has been most pronounced in industries or processes whose output or character is “intangible,” rather than “tangible.”

Voice services and text messaging are examples of such intangible products, including other products susceptible to digital delivery, especially all content products. Though we might disagree about the degree of displacement, OTT voice and messaging products increasingly are substitutes for carrier voice and messaging products.

source: Ovum

To be sure, "usage" is not the same as "revenue." Increased use of OTT messaging does not mean a linear reduction in carrier messaging, just as increased use of Skype does not translate linearly to less use of carrier voice. 

On the other hand, in addition to spurring more use of messaging and calling overall, OTT arguably does lead fairly directly to lower profit margins for operator voice and messaging services. 

source: Analysys Mason

As a rule, any industry touched by Internet distribution tends to see a trimming of supplier profit margins. In fact, that is an important strategy for digital disruptors, where the strategy literally is to destroy profit margins in a traditional business, gaining share and then dominating the new business, with permanently lower profit margins, and possible lower gross revenues.

source: Telco 2.0

That is the theory that underpins the pursuit of “zero billion dollar markets.” One sense of the word is that big markets get created when whole new industries are founded. But one other use is more ominous for incumbents.

That is reliance on marginal cost pricing to literally “destroy” the pricing regime in an existing market, allowing a new competitor with radically lower cost structure to displace the current leaders. That is the essence of the phrase “analog dollars, digital dimes and mobile pennies.”

It is a rational strategy for a new provider to attack a market with much-lower prices, shrinking markets but gaining leadership in the process.

Also, there is a third meaning of the term: any market not large enough for a provider to maintain a direct sales force. Paradoxically, opportunities for channel partners could grow as product categories contract, though that trend will conflict with the effort to market using mass market channels.

Overall, over the top apps--one clear manifestation of the Internet impact--boost usage, but attack profit margins. Telcos sell more data capacity, but lose value and revenue in their traditional revenue streams.