Telcos should proceed cautiously with communication apps

Ovum recently spoke at the Metaswitch Forum 2011 about the role of apps in telcos’ future strategies. Two of the recurrent themes at the event were the future of voice, and the increasing availability of third-party communication apps that enable users to make calls and send SMSs. These types of apps present a significant threat to operators as they can damage telcos’ revenue streams and undermine the intimate relationship that telcos have with their clients. To counter this threat, telcos are launching their own apps, deploying browser-based communication customers, and offering rich communication suite and unlicensed mobile access solutions. During white-label, customizable apps from companies just as Metaswitch can make it easy for operators to deploy these solutions, telcos must make sure that they understand the risks that they pose to their existing businesses.

Ten years ago, Vonage’s plan to offer cheap VoIP (Voice over Internet Protocol) calls caused alarm bells to ring for fixed telcos. Afterwards exploring and abandoning plans to block VoIP (Voice over Internet Protocol), many fixed telcos used two coordinated strategies to overcome the threat. Firstly, the telcos moved from per unit pricing to access and volume pricing. Secondly, the poor availability of naked DSL solutions meant that the price differential that underpinned the business models of Vonage and other third-party VoIP (Voice over Internet Protocol) providers collapsed.

Mobile operators are currently in a similar position to the fixed operators of ten years ago as third-party VoIP providers look to move in on their territory. WhatsApp has had a significant impact on theNetherlandsmobile market, and other companies just as Skype, Viber, and Ping are looking to have the same impact on other mobile markets around the world.

In response to this threat, mobile operators have adopted two strategies. Firstly, they have introduced larger call and SMS bundles to undermine the price differential between their voice services and third-party voice apps. Secondly, they have scrapped “unlimited” data bundles for tiered pricing, which has made it more expensive for clients to extensively use their mobile devices for VoIP calls.

However, the increasing availability of free Wi-Fi is a game changer. The popularity of homezone tariffs demonstrates that many clients frequently use their mobile phones at home and in the office, which are both places where clients are as well likely to have access to free Wi-Fi. Using third-party communication apps over free Wi-Fi makes it easy for clients to make free calls, send free SMSs, and incorporate “presence” in ways that are beyond the control of mobile telcos.

Our forthcoming Research Radar reports, which examine the new innovations launched by telcos in the first half of 2011, found that telcos just as Lime in the Caribbean, Play inPoland, O2 in theUK, and Rogers inCanadahave all launched their own communication apps, web-phones, and UMA solutions. RCS may even become a serious option for some telcos in the nearly future. Ovum has as well seen demonstrations of apps that can switch a call seamlessly between mobile phones, fixed phones, an iPad, and a TV, which potentially enables fixed telcos to introduce communication apps that could threaten mobile operators’ businesses.

Most of these developments, don’t involve forcing clients to switch to apps or web clients to make calls. For clients that would have if not embraced a third-party VoIP service, the introduction of a telco app that does the same thing will be a positive development as telcos can often provide benefits that third-party providers cannot offer. For instance, telcos can provide users with the ability to move seamlessly from Wi-Fi to 3G and back, a telco-backed app would not require a new identity, and telco apps may not require users to make additional payments for communication to off-net users. Should the contingency arise, if operators integrate the app with their account management functions, customer-support services, and product promotion they will be able to offer their clients a superior user experience.

The best case scenario for telcos is that their apps will outperform the non-telco apps and restore the status quo. Communication apps could as well become defensive tools by disincentivizing clients from establishing a relationship with a third-party provider. Telcos could even use the apps as a spoiler that floods and confuses the market so as to prevent any non-telco from attaining the sort of critical mass that will pose a viable threat to telcos.