Digital content will be king for networks as consumer spend to double to $145bn

Profile picture for user ddpreez By Derek du Preez June 2, 2014
Summary:
Mobile and network operators are having to tap into OTT application deals to salvage declining revenues in SMS and voice.

 

Before the emergence of smartphones and pervasive internet access, network operators were able to enjoy a grace period of strong revenue income based on their

spotify right
core business proposition – voice and SMS. However, as we all know, these services have been heavily commoditised thanks to cheap internet enabled services, such as Skype and What's App, which have sent revenue streams into free-fall. Although many argue that the network operators themselves missed a trick in not developing these services themselves early on (although many are still trying) there is another opportunity to now differentiate themselves and get ahead of the game – valuable digital content.

The key being that digital content is now often based on a subscription model delivered via the internet – a model that network operators know all too well and are able to easily adapt and integrate in order to bundle up packages with unique content deals for their consumers. Although still early days for this business model, networks need to realise the importance of it. Companies such as Netflix and Spotify also recognise the marketing opportunities available to them by partnering with operators to deliver their 'overt-the-top' (OTT) applications as part of a bundle, not to mention the opportunity of having their services prioritised, and so there is a need to get in their quickly while networks can still get hold of these services to differentiate themselves.

Nick Thomas, digital media practice leader at analyst house Ovum, was speaking at the OTT Partnership focus day in London this week where he said that he has just completed a year-long research project that found that global consumer spend on digital content will increase from $76 billion in 2013 to $145 billion in 2018. Effectively doubling in five short years. He summed up the increasing demand by saying:

“These content deals are not just a 'nice to have', they are key to a (network provider's) future revenues. This is like feeding a huge beast that is eternally hungry.”

The six Cs

Thomas himself accepted that analysts like a list and they like alliteration, and so he and Ovum have put together a list of six Cs that highlight the importance of why these content bundles are important to network operators and how the market is changing. Thomas is adamant that access alone is not enough for network providers to survive, they need content as well.

So, here's the six Cs:

  • Commoditisation – SMS and voice are now a commodity service and their value to the networks is on the decline. Thomas said that many network providers are now offering unlimited bundles for these services, which is a key indicator of their long-term value for the network's business strategy. However, fewer networks offer unlimited data – wouldn't it make sense to offer content heavy services as part of your bundle to help use the chargeable data up? Yes, yes it would.
  • Content – An obvious one that I've discussed already. Thomas said that demand for content services is 'inexhaustible', but at the moment, finding really valuable content is a challenge. As a result, there is an obvious opportunity here.
  • Convenience – Consumers want quality content services available across all their devices, have payment for these services made easy, have it easy to find and make it easy to pay for. Networks can address all of these challenges for consumers by integrating their services into their current bundles.
  • Collaboration – Thomas said that collaborating with digital partners is going to be key to future growth strategies. It's going to be a lot harder for content providers and for networks to go at it alone, they should work together to tap into the global revenue opportunity.
  • Consolidation – Those networks that aren't that keen on the collaboration idea are likely to acquire content aggregators and providers. As a result, we are likely to see some consolidation in the market.
  • Consumers – Consumers are becoming far more comfortable and accustomed to spending via an access/subscription model, rather than a single transaction model. This lends itself well to the networks' preferred method of delivery and payment.

thumbsupmobile
Thomas said that these six Cs are creating an opportunity on both parts for some valuable new revenue streams and companies are waking up to it. For example, he said that music streaming revenues are growing at the expense of single track downloads – global streaming revenue is set to reach $4 billion by 2018 and yet there are huge geographical areas where music bundles are not available. There is a lot of room for growth (which is likely to be a factor in Apple's decision to buy Beats for $3bn last week).

Spotify recognises the opportunity

One of the main companies that is ready to take advantage of this OTT partnership opportunity – and is already doing so in 39 markets across the globe – is the world's largest music streaming service, Spotify. Jone Oostveen, partnership development business director at Spotify, was also speaking at the conference and provided attendees with some insight into how the company takes advantage of this growing revenue opportunity.

Oostveen said that the key thinking behind partnering with network providers is to give Spotify exposure in markets where it is still growing. He said:

“When we partner with an operator we normally do it to enter an market, marketing agreements are important and we can integrate our end user proposition into theirs – and they have been very successful. They are very important to us, they bring us a lot of users.”

“We give the carrier exclusivity in terms of marketing, in terms of integrating our premium proposition into their subscription. We are available for everybody else, you can use the free or paid version. We work together with one operator that can integrate and really promote Spotify.”

Surprisingly, Oostveen said that Spotify isn't taking advantage of these deals in order to get traffic to Spotify prioritised (although it will take advantage of

spotify2
network provider CDNs) – it is largely just a marketing play at the moment. He said that partnering with Spotify is good value for the network providers, as consumers are just going to see their network access as a commodity and not high value.

“Operators want something to differentiate themselves, which is why we usually give them exclusivity. They have to make 4G relevant, the network access itself doesn't mean anything to the end user. It has to be something like music or TV – something that is relevant for the end-user. They can do that with value-added services.”

Verdict

  • Most people in attendance today feel sorry for network providers – including me. They are burdened with investing huge amounts in their networks, which quickly becomes a commodity, and then they have to negotiate with these application providers (which are traffic heavy) to come to sort of mutually beneficial agreement. However, instead of feeling sorry for themselves, they should recognise the opportunity available to them and make a grab for the most popular companies out there while they still can. This is going to only become more important as the Internet of Things kicks off.
  • One of the points raised by Spotify today, which I thought was interesting and worth mentioning, is that operators should also work with these application providers on mobile advertising. Both parties hold a huge amount of data on their customers and the opportunity if they work together on this challenge is likely to be greater than if they work as single entities.