TU Me: Can Telefónica beat OTT players at their own game?

If you can’t beat them, join them. And then beat them. That seems to be what Telefónica is saying with the launch last week of an OTT voice and messaging app and service called TU Me. This cloud-based app allows users to text, call and share their photos and location information using their mobile data allowance. By doing so, it competes directly with OTT services such as Skype, Viber and WhatsApp.

TU Me, available now in an iOS version and soon to be launched for Android, is free of charge. Users need to have the app installed, so for now it cannot be used to make calls to PSTN phone numbers. But the service is available to non-Telefónica subscribers too, so it could easily spread far and wide. By Thursday, TU Me was reported to be the No.1 application in Spain for the Apple App Store, not bad for a beta service only available in English.

So why would an operator, one of the biggest, risk cannibalizing revenues with an OTT service? Such services have been widely blamed for billions in lost revenues for operators. And attempts to charge extra for access to OTT instant messaging apps have not proved popular, as mentioned on Fierce Wireless.

Probably the single greatest justification can be seen in one quote from Telefónica. It would rather “keep the customer than lose them to other products”.

Telecom analyst Dean Bubley, who has long predicted that more operators will shift into the OTT space, writes on his Disruptive Wireless blog that TU Me differs from many of the other OTT offerings out there.  “…apart from Skype and Google Voice, they're not run by companies with 300m+ existing users to whom they can evangelise (sic) and bundle.  Telefónica also ought to have some cost advantages, as it's got its own cloud platforms and back-office capabilities.”

And of course Telefónica was already addressing the OTT threat with its purchase of Jajah, something you can only presume has helped in its development of TU Me.

So how will Telefónica make money from a free service? Additional data revenues, maybe, although TU Me works over Wi-Fi too. Ingrid Lunden at Seeking Alpha says this:

The idea is to get as many people as possible using it, and then monetize it along the lines of how Skype has done - through the rollout of eventual value-added services. That could mean enhanced communications, but Telefónica tells me that it will likely also mean adding mobile advertising and other ways of generating revenue.

We will just have to wait and see how the service will do, how it will affect revenues and numbers for Telefónica and its competitors. At least no one can accuse TU Me of being a case of “me too”. 

Tough times for operators in South Korea

With the highest smartphone penetration of any country in the world, it seems natural to look to South Korea for a glimpse into what the future might hold for operators in other mature markets. And it’s certainly an interesting picture. The question is just how worried it should make the operators.

First and foremost, all those smartphone users – over 20 million in a country of just under 49 million people, according to one recent count – mean truly staggering volumes of data traffic. South Koreans already generate more data traffic per person than anybody else, with volumes increasing almost 20 times last year alone, and are set to reach over 100 gigabytes each – every month – by 2015. To put that in perspective, it’s roughly what today’s US user gets through in a year.

So it’s hardly surprising that LTE is a hot topic in South Korea. Each of the three major local operators has launched an LTE offering, with SK Telecom predicting 10 million users on its LTE network by 2015. But there are already signs that LTE alone won’t be enough – and may even make things worse. KT’s LTE subscribers are using 170 percent more voice services and 112 percent more data than their 3G customers, while SK, having spent USD 2 billion in 2011 on network upgrades, is already talking about rolling out LTE-Advanced by 2013 to keep up with demand. When the best way for KT to show the media their LTE capabilities without signal interference is to hold the briefing on board a ship, as it did last week, you get a sense of just what they and the other operators are up against.

Sounds tough, right? And that’s without the OTT player that boasts 42 million users exchanging 1.3 billion messages every day (in a country of 49 million people, remember). So far the operator response to the runaway success of KakaoTalk has been an ineffectual mixture of denial and overpaying for rushed acquisitions in the same space, as exemplified by SK’s purchase this month of free mobile messenger service Tic Toc (revenues so far – zero) for a reported 20 billion won. KakaoTalk has issues of its own, not least a net loss of 14.2 billion won in 2011, but it’s hard to see how even the ongoing deployment of Rich Communication Services (RCS) based on the GSMA's Joyn initiative can help the country’s operators regain the upper hand.

There is also a political dimension. In the run-up to December’s presidential election the telecom market has been one of the battlegrounds. The in-power Saenuri Party promises to cut mobile voice call rates by 20 percent and force operators to offer unlimited LTE data plans. Estimates suggest this policy could cost operators a combined 1 trillion won in revenues. The opposition, the Democratic United Party, claims it will abolish basic charges while mandating free text messaging and public Wi-Fi, which may leave operators down by 7 trillion won. Little wonder that one telecom insider recently complained that politicians in South Korea “lack any insight about the industry at all.”

What do you think? Is the Korean experience a sign of things to come for operators everywhere as smartphone usage continues to rise, or can the right network strategies, a smarter response to the OTT challenge and different political priorities make a difference?

Meeting the OTT threat

The threat to operators from OTT players like, for example, Skype and Viber, is two-fold: they cut into operators’ voice-generated revenues and hog bandwidth in the networks.

A large number of operators have opted not to do anything to meet this threat – or at least they don’t actively fight it, and allow the traffic through their networks. Others have been more active in developing reactive strategies.

There are several examples of operators collaborating with OTT players. A fairly standard approach is to offer your subscribers access to OTT services like Skype – as, for example, 3UK does. Another example is Sprint, which offers its customers Google Voice.

Another way of dealing with OTT players is to become one yourself. Telefónica provides an example: In 2009 it bought Jajah, a competitor to Skype, and thus became a player in the OTT market.

There are also some operators that are looking at charging their customers for VoIP services – for example, TeliaSonera. At this year’s MWC, their VP of Service development, Tommy Ljunggren, said:  “If you want to use those services on our network, you have to pay; if you don’t, those services won’t work”. Similar messages have caused some stirrings in the operator’s Swedish home market. Håkan Dahlström, Head of Business Unit Mobility Services, said in Swedish daily Dagens Nyheter (article in Swedish) “There is a perception today that everything IP-based should be free. But we are going to charge for mobile voice calls, even if they are VoIP”. And through its Spanish subsidiary Yoigo, TeliaSonera is already charging for premium VoIP services.

But there is a dual drawback to charging customers: As Royal KPN in the Netherlands discovered, consumers may react strongly and that can lead to discussions about net neutrality and even legislation that operators do not like. Secondly, and more importantly, customers may take their business elsewhere – because there is almost always a competitor or two ready to offer unlimited data use, flat fees and so on. 

The operators that are not doing anything yet might be developing other strategies. Or they may be waiting to find out if there is a winning strategy for dealing with OTT players. Perhaps that winning strategy is a combination of collaboration and competition – we might call it “coopetition”.

What do you think?

Is it "freemium or bust" in over-the-top telecom?

With the ambitions of Google, Skype/Microsoft and Apple - combined with the latest HTML5 standardizations – there are strong forces pushing for voice and video to be free. Really, it is no longer a question if voice will be free but "to what extent will it be free."

This poses a host of challenges for operators, of course.  But the same is true for over-the-top (OTT) voice providers themselves. If they are going to make it on their own, how do they survive?  Specifically, how do they make money?  Prepaid plans? Postpaid plans?

The answer seems to be freemium.  This means that the basic service is provided free, while charging a premium for advanced features or better functionality. Freemium has been one of the models of choice in the gaming world and among app developers for a good while now, to the point where some are talking about moving beyond freemium.

Now it is the most common revenue model within the OTT world – including fring, Raketu, voxox, telfree and MO-Call, among others.

Why freemium?  It allows a company to educate consumers and drive them to the paid services, all while they build trust in the service with the free services.

Yet there are drawbacks. One is that paid users subsidize the free users to some degree, which can lead to bad feelings.  But the biggest problem?  A very low conversion rate from free to paid.

A good example of this is Spotify, the streaming music service based on a freemium model (and with a strategy based largely on mobile).  Even as it expands into the US and adds subscribers, it is losing lots of money – USD 41.5 million in 2010, a significant jump from 2009.

But at Billboard, they say that Spotify – and its freemium model – just need time:

But it's too early for rights holders to be frustrated by the inequality of Spotify's revenue … This process will take time. Spotify and other freemium, on-demand services are young companies that are still figuring out the marketplace. 

But how much time? Do OTT voice companies have the time – and money – to let the freemium model develop?

And if not, what other options do they have?

Are free voice and messaging startups looking to succeed … or get bought out?

It is inevitable.  Free voice and messaging services are going to transform the way we talk and text on our mobile phones.  And they will change the way operators do business, how governments regulate the internet, how we are billed for our data usage.

But not quite yet.  And probably not by the current crop of competitors.

Because while companies like Viber, Tango and fring might pose an existential threat to traditional operator-driven voice and messaging revenues, most of them have limited funding, no profitbability and face a brutal competitive climate.

In other words, yes, they are a threat as an industry, but, individually many of them are doomed to failure. To succeed, “over-the-top” companies need high smartphone market penetration, flat mobile broadband fees, operator partnerships and an enhanced user experience, says the management consulting firm Arthur D. Little.

And all that will likely happen. In a base case growth scenario from 2010 to 2015, Arthur D. Little projects that the mobile voice “over-the-top” players could grab up to 10 percent of the overall mobile voice market. But their curve doesn’t really get steep until 2013.

So who’s going to make it to 2015? Or even 2013?  


The bulk of funding for this sector is coming from rather wary venture capitalists, with other institutional players slow to invest.  And listed companies have underperformed compared with the S&P 500 since 2006.  Even a strong customer base is no guarantee of success, with a very low barrier for customers to switch between free services. Of course, this analysis does not apply to the heavyweights, like Google Voice, Skype or Jajah, all of whom are part of strong, well-positioned companies (Google, Microsoft and Telefonica, respectively). But for the smaller players, it is still the Wild West.

And like in the real Wild West, the smaller companies will have to rely on their strong ability to innovate, to develop new products and to navigate a shifting marketplace. And many of them seem to have these skills.  But that raises another question:  To what end? To succeed on their own?

Or is it more likely they are in a window of opportunity to partner with operators or be incorporated into established communities like Google or Facebook, all of which have the resources and big picture skills to succeed in a world of easy connection?

What do you think?  Are we overestimating or underestimating the disruptive potential of these internet-based voice providers?