OTT Messaging is Not Cannibalizing Text Messaging, Portio Research Says

Trying to figure out how much “damage” Skype and other over the top voice apps have done to international voice is a difficult exercise. Skype gets used where the alternative would have been “no call,” so Skype usage volumes partly represent incremental usage that actually does not cannibalize existing revenue.

On the other hand, there also are instances where Skype or other over the top apps will be used as a substitute for a long distance call using the public network.

The same sort of issue applies to messaging apps displacing text messaging. Some over the top messaging is activity that would not have happened were text messaging the only alternative.

And some OTT messaging gets used in place of text messaging.

Also, as typically is the case for Internet apps, usage is not the same thing as revenue.

“During 2012 and 2013 we have seen many reports that operators are losing $20 billion to $30 billion in SMS revenue to OTT messaging apps,” said Karl Whitfield, a Director at Portio Research. “We see reports that OTT traffic will be double that of SMS by the end of 2013. This is wrong on both counts.”

It may be true that SMS revenues are levelling off and that OTT is on the rise, but SMS is still generating revenues of $15.3 million per hour, 24/7, that’s a massive $133.8 billion in 2013, Whitfield says.

Over the top apps generate about $3 million an hour, by way of comparison.

Worldwide SMS revenue has gone up year after year since the early 1990s and will continue to be above 2010 levels until 2017, Whitfield said.

In fact, in some markets, SMS and OTT apps are coexisting, serving end users in different ways.

There is a huge uptake of OTT messaging in Japan, particularly with local player LINE, yet the SMS market remains healthy and stable, he says.

The same goes for South Korea, where KakaoTalk is enjoying huge success; here again the SMS market remains stable and is not declining as many predicted.

Where SMS has seen a decline, in markets such as Spain and Greece, there has been an overall fall in subscribers and revenues at the same time.

“Our research into mobile messaging completely contradicts what some other industry observers are saying,” said Whitfield.

 

Karl Whitfield

                                                                                                                                                                                                                                                                                                    

Global OTT and P2P Messaging Traffic (Billions)

	2010	2011	2012	2013F	2014F	2015F	2016F	2017F
P2P SMS	5,812	6,546	6,623	6,687	6,654	6,522	6,304	5,931
OTT Messaging	1,494	3,840	6,774	10,452	14,970	20,437	26,359	32,141

source: Portio Research

Will You Save Money Buying Future Online TV?

Even though everybody sort of assumes that in some future time, when consumers can buy video content channel by channel, if not program by program, most consumers will save money. That might not be the case.

Bandwidth consumption that today is bundled into the cost of the entertainment video subscription will become disaggregated. Users will pay separately for Internet access and content. And that might mean users pay more for Internet access, as well as more for their content.

Assume a one-hour TV show streamed to a TV requires 1GB at standard definition, and 2 GB, for an hour of HDTV. Assume you are a typical users and consume five hours of video a day. Assume half your consumption if HDTV and half is standard definition.

That implies 75 hours of standard definition TV consumed per person, per month. At 1 GB per hour, that’s 75 GB of data. The 75 hours of HDTV represent 150 GB of data consumption, for a total of about 225 GB of data consumption a month, for linear entertainment television.

For those of you who believe you could save money someday by buying only the channels you want online, and assuming there is only one person in your household, the cost of watching TV would include the cost of your bandwidth and the cost of your subscription or subscriptions.

That might not be an issue for a single-person household with a monthly usage allowance of 300 GB. Assume the monthly cost is about $70 for such a plan.

The math gets trickier for multiple-person households, especially if many users are watching different programs. But assume 300 GB will do.

Assume a household now pays $120 a month for Internet access and video entertainment service.

Assume the TV service is dropped, in favor of buying online alternatives. If there was a bundled plan discount, and that is lost, assume the household pays $75 a month for Internet access (300 GB), and then buys five channels costing $12 each. That implies $60 for the five channels, plus $75 for the access, for a total of $135 a month.

Surprise, surprise. You wind up paying more than you used for, for just five channels of video and Internet access.

The economics become worse as you add more channels, or if multiple users or higher viewing mean you need to buy more bandwidth, at about $10 per gigabyte.

Bundles Lift Revenue per Customer, Drive Revenue Growth, Reduce Churn, Even in Tough Markets

Portugal Telecom provides instructive guidance on the importance for fixed network service providers of triple play packages and video services, even in markets with negative growth of voice services and tough economic conditions a a backdrop.

In the second quarter of 2013, overall revenue fell 5.5 percent. But in Portugal, broadband access revenues grew 8.5 percent. Video entertainment revenues grew 9.8 percent. Uptake of triple-play bundles grew 16.7 percent and fiber to home revenues grew 25 percent.

Without those revenue contributions, results would have been far worse. Also, bundles reduce customer churn and raise average revenue per unit because consumers are buying more than one product.

Despite Earlier Denials, Apple Will Ship a Low-Cost iPhone in September 2013

Apple used to deny categorically that it would sell a low-end iPhone. Then the stance softened in public to something like "we'd never sell a product that sucked." 

Some observers thought that "we'll never sell a low-cost iPhone" stancewas destined to prove wrong, if only because of the need to compete in emerging markets where the historic price of an iPhone is a prohibitive barrier to adoption.

And some would have pointed to Apple's own history of selling iPods in multiple price ranges and models as a precedent. 

But it now appears Apple will indeed ship a low-cost iPhone in September 2013. Many financial analysts have worried about that particular event, since it has direct implications for Apple iPhone average selling prices. 

Some worry that the lower end device could cannibalize sales of the standard models. But a lower cost iPhone is a risk Apple simply has to take, unless it wants to watch other smart phone suppliers dominate emerging markets. 

Morgan Stanley's Katy Huberty thinks the lower-cost device, tentatively dubbed the iPhone 5C, will add 13 points of market share for Apple in China.

Smart Phones Will Close Digital Divide Globally

The “digital divide” has antecedents in the communications business. For many decades, policy makers struggled to figure out how to provide basic telephone service to billions of human beings who “had never made a phone call.”

And though household income and use of the Internet, mobile phones or fixed network telephones are correlated and causal, in any market, it still would be reasonable to expect that smart phone technologies will rapidly allow hundreds of millions of people to use the Internet for the first time, in the same way that mobile networks solved the problem of getting phone service to the “next billion” users.

Over 6.6 billion mobile phones will be in use by the end of 2017, according to CCS Insight's new market forecast. About 66 percent  of them will be smart phones, up from less than 25 percent in 2012.

In the first three months of 2013, smart phone shipments exceeded those of non-smartphones for the first time ever. Sales of smartphones have been helped by new, cheaper devices, especially, but not only, in emerging markets. The mobile and media analyst firm expects 1.86 billion mobile phones to be shipped in 2013, of which 53 percent will be smart phones

That means smart phone markets in Western Europe and North America will see penetration levels approaching saturation point in these markets within three years.

More than 50 percent of the mobile phones in use in these regions are already smart phones. CCS Insight predicts this figure will grow to more than 80 percent in 2015. Beyond 2015, much of the growth will come from emerging markets.

At the same time, sales of tablets are rising at a staggering rate. Altogether, global shipments of smart mobile devices (smartphones and tablets) will increase 2.5 times between 2012 and 2017, to reach 2.1 billion units. CCS Insight predicts that by 2017 the combined number of mobile phones and tablets in use will exceed the world's population.

Nor shouild we  underestimate the role of smart phone access in narrowing “gaps” between regions, states and population segments in use of the Internet, either in developing or developed regions.

It now is clear that the ways people choose to use the Internet is becoming more segmented, and that many users prefer to use smart phones rather than fixed Internet connections.

According to a 2013 analysis conducted by the Pew Internet and American Life Project, the digital divide between Latinos and whites is smaller than what it had been just a few years ago.

To be sure, there are sure to be gaps between first world and third world access speeds. As more gigabit networks are deployed in developed areas, the gap might even increase. But it also will be the case that “some Internet access” will be available to most people in emerging markets faster than many now predict.

At that point, ITU had estimated that the “number of people without access to telephony service has decreased to less than one-fifth of world population.”

The big breakthrough was mobile phone service. It took around 125 years to reach the first billion fixed lines across the world (1876-2001).

Mobile telephony has reached the first billion in 21 years (1981-2002) and the second billion users within just three years (2002-2005).

While the installed base of smart phones accounted for just over 20 percent in emerging markets at the end of 2012, Ovum estimates that it will reach nearly 50 percent by 2017, which translates to over two billion devices.

As the fastest-growing segment within overall devices, smart phones will be a critical driver of increased mobile Internet use across emerging markets, Ovum says.

Video Business Loses Customers, Again

The 13 largest subscription video providers in the United States, representing about 94 percent of the market, lost about 345,000 net video subscribers in the second quarter of  2013.

In the second quarter of  2012 and in the second quarter of  2011, the industry lost about 325,000 subscribers, according to Leichtman Research Group.

Those 13 cable TV, satellite TV and telco TV  companies represent 94.6 million subscribers.

Cable TV companies having about 50.5 million video subscribers, satellite TV companies have 34 million subscribers, and the telephone companies have more than 10 million subscribers. That implies the cable TV industry has 53 percent market share, satellite TV firms have 36 percent share, while telcos have 11 percent market share.

Some will note those trends and conclude that disruption of the TV business is coming soon.

The predictable changes we now expect to see are small market share gains by telcos, every quarter, at the expense of cable TV providers, with satellite provider share roughly stable. But the changes represent fractions of a percent of the installed base.

That was the story in the second quarter of 2013, according to IHS. AT&T U-verse and Verizon FiOS (with some small additions by independent telcos) added a net 398,000 video accounts during the second quarter, up from 304,000 net adds in the second quarter of 2012.

The U.S. video subscription business as  while lost a net 352,000 subscribers in the second quarter, according to IHS.

In a market with nearly 95 million to 104 million subscribers, that really isn’t such a big deal. That’s a market shrinkage of about one-tenth of a percent, to three-tenths of one percent.

Some might point to apparent disinterest in video services on the part of younger consumers forming households.

So far, thought, the changes indicate we are past the peak of the product life cycle, but are not yet in a “disruptive” phase where the decline becomes significant.

Multi-channel Video Provider	Subscribers at End of 2Q 2013	Net Adds in 2Q 2013	Net Adds in 2Q 2012
Cable Companies
Comcast	21,776,000	(159,000)	(176,000)
Time Warner	11,911,000	(189,000)	(169,000)
Charter	4,073,000	(51,000)	(72,000)
Cablevision*	3,171,000	(20,000)	0
Suddenlink	1,189,900	(22,900)	(19,900)
Mediacom	983,000	(16,000)	(22,000)
Cable ONE	575,762	(12,418)	(9,610)
Other Major Private Cable Companies**	6,810,000	(85,000)	(70,000)
Total Top Cable	50,488,762	(555,318)	(538,510)
Satellite TV Companies (DBS)
DirecTV	20,021,000	(84,000)	(52,000)
DISH	14,014,000	(78,000)	(10,000)
Total Top DBS	34,035,000	(162,000)	(62,000)
Telephone Companies
Verizon FiOS	5,035,000	140,000	120,000
AT&T U-verse	5,001,000	233,000	155,000
Total Top Telephone Companies	10,036,000	373,000	275,000
Total Multi-channel Video	94,559,762	(344,318)	(325,510)

Sources: The Companies and Leichtman Research Group, Inc.