There are dozens of OTT communications apps. Will they all find homes?

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Session name: Beyond the carrier model – the rise of OTT
Chetan Sharma
Mark Lefar
Adreas Bernstrom

Announcer 00:00
–here, how many of you people love your mobile phone carrier? I mean love them. Anyone? One hand right there – probably works for AT&T. [chuckle] Just kidding. Well we’re going to go Beyond the Carrier Model: The Rise of OTT, with Chetan Sharma – President, Chetan Sharma Consulting and analyst for the GigaOM research. He’s going to be talking with Andreas Berstrom, the CEO of Rebtel, and Mark Lefar, the CEO of Vonage. Please welcome our Beyond the Carrier panel.
Chetan Sharma 00:34
Hello again. We’re going to be talking about all the top services and what does it mean to segment as well as industry in general. We’re delighted to have two of the most respected players in the segment – CEO of Rebtel, Andreas and CEO of Vonage, Mark. We were just talking backstage about the war stories of the iPhone launch and other stuff, and I’m sure we can have many more discussions around that in the future. Today we’re going to talk about the OTT segment. Mark, let me start with you. Vonage has been around for a long time, has seen the evolution of communication services. At this point in time, how do you describe the OTT space as it relates to communications and maybe briefly describe what you expect in the next two, three years.
Mark Lefar 01:27
I think we’re a an inflection point. We’ve seen the popularity of over-the-top and consumer acceptance made possible by smart phone penetration, broadband availability, and access globally to a couple of operating systems, so people are very familiar with it. But I think you’ve got a broad array of value propositions that are rethinking how do they return the capital back to the folks who invested. So you’ve got a lot of free services in search of a business model. I think we’re starting to see in small and medium businesses over-the-top is now starting to explode, and there’s a place where there is real value to be created where much of the core business is still on traditional telecommunications providers. I think there’s a lot of conversation about what’s going to happen in enterprise. So, I think in a ten chapter book we’re probably in chapter three. Everybody’s aware of it now, but I think there’s much more of it to play out over the next few years.
Mark Lefar 02:26
If I flash forward I think we’re going to see tremendous compression on pricing. I think you’ll continue to see large free communities move. I think the stickiness of some of the large free communities that exist – whether they become federated with other communities or they shift to the next exciting change in how people are communicating, whether it be entertainment enhanced messaging– Andreas was talking earlier about what we’ve seen with Instagram and Snapchat as innovations on something as simple as picture sharing. I think we’re going to see more of the same over the next few years. But I think the real revenues are going to come perhaps more in the business segments than in consumer.
Chetan Sharma 03:12
Andreas, you been a veteran of the space, among the very few players who have been generating revenue north of $100 million, obviously much larger of course for Vonage. Since you have seen the revenue evolution for some time, what’s your sense of the space and where the future revenues will come from? Is it going to come from scale, or is it going to come from new services?
Adreas Bernstrom 03:38
I think if you look at the space now, there are seven or eight services with around 200 million users, and there are new services being launched like Snapchat which are also becoming viral. So the need for these communications services seems to be very, very apparent. Most individuals are using different ones for different services or different functions and features. The problem is the monetization. There’s been half a billion dollars pumped into these companies, and at some point they’re going to need to see a return. If you look at instant messaging ten years back on the desktop, this is the next step of that. Those companies are not generating a huge amount of value, but 250 million people in a social graph has a value. If it can be put to good use within a home, a larger player that can monetize that through advertising or through stickiness or distribution, then there’s an opportunity. But the chances are that some will get bored, and the other ones will scale back and fulfill certain functions. But you’re seeing huge amounts of innovation in what messaging, what communications actually does.
Adreas Bernstrom 04:48
One of the most interesting things I’m seeing at the moment is actually packaging this technology and making it available for app developments, because it’s a hygiene factor. Pretty much every single app in the app store has a user case for having some form of communications in it. It makes it stickier, makes it better, makes it more engaging. How can that be packaged and given out in an extraordinarily simple way to enhance a user experience that already exists? I think that’s where you can monetize.
Chetan Sharma 05:16
I heard two new things that might expand on the current horizons. One is looking at new segments – enterprise segment as a way to bear monitization of these services or packaging of these services, and looking at developers as a channel to provide these services. Could you expand on the SMB segment first and then the larger enterprise as to how you think about those segments.
Mark Lefar 05:43
Sure. In fact, we announced just last week a definitive agreement to buy a company called Vocalocity who is one of the fastest growers in the SMB space for cloud based VOIP services. Software is the service platform. They’re growing faster than eight by eight and you’ve you still got, for small and medium businesses with 1,000 or less employees, it’s a $15 billion voice market. Only 15% of the market is in hosted VIOP at this point in time, growing at roughly 30% a year. If you look at the three largest players their total revenues are less than half a billion dollars. Vocalocity’s growing at 40%, and they provide a value proposition which is 50% of the cost, a much better feature set, monitoring, the ability for a small or medium business to sign up for service.
Chetan Sharma 06:32
Is distribution directly to those SMBs or through–
Mark Lefar 06:35
It is. It’s directly to the SMBs. 45% of the distribution is digital, so SEO/SEM and web aggregators, referral network, VAR channel, and then outbound telesales and direct marketing. So, you don’t actually have full-time feet on the street–
Chetan Sharma 06:51
US and or global?
Mark Lefar 06:53
Vocalocity is primarily the US expanding into Canada, but as part of our growth strategy which is international expansion we’ve announced going into Brazil. We’ve got partnerships in other countries as well. This platform will travel well outside of the US. What we find is there’s very low awareness still of small and medium businesses, and once they actually try a cloud based service, particularly those that don’t have IT staffs– The 60% of the small medium business market that is 20 or less employees is looking for ways that they can actually customize their communications and use it in the business. There’s a mobile component that goes along with it. They want it to be working on their iPad. They really want to have full blown communications as they can control it for all their workforce across any broadband connected device. They want good broadband connectivity, and they want to use software over-the-top. We think that’s where there’s a great place to monetize some of the core capabilities that Vonage has built.
Mark Lefar 07:46
We still think that there’s plenty of room in the consumer space, but it’s very much that the compression and stealing of market share for what I’ll call overpriced services like international long distance, and Andreas’s team has done a fantastic job in that space, built a nice business on international long distance. It’s been a place that we’ve been able to grow our business over the last couple of years as well. I think you’re going to see that more outside the US where there are still oligopolistic pricing practices. But I agree with Andreas’s assessment of what’s going to happen likely with the large social communities of these 200 million plus user communities.
Chetan Sharma 08:26
There are not that many large players who can absorb these. Either they might have an existing strategy or they’ve acquired a player. So it seems like there are not that many avenues in terms of an exit. Do you expect a wave of M&A in the next 12 months or so amongst these players?
Adreas Bernstrom 08:47
It seems like there’s a little bit of a Mexican standoff. Everybody’s waiting to see what happens. You’re either going to run out of money because someone’s not wanting to, or willing to, make the bat, or there’s going to be some kind of consolidation. My gut tells me there’s going to be a bit of both. Certain companies where the traction is falling off a little bit will be left to flounder, and the ones that actually become category winners are the ones to become adopted. Mostly for the inventory side for distribution.
Mark Lefar 09:18
I might offer a slightly different take. I agree with you that there’s probably one or two that will actually get taken out. And I think when that happens the rest will be forced to federate their communities. What you’ll start to see is if they really federate their communities you’ll start to get this large standalone–
Chetan Sharma 09:33
A lot of the communities are also segmented by communities are also segmented by geography, right? Japan, Korea, China and so forth. Do you see more collaboration between–
Adreas Bernstrom 09:41
I’ve had the conversation with all the– I’ve been contacted a number of times saying, Why can’t we connect our networks and actually be able to speak across? Obviously, at the moment it’s a broken loop. You have to go into five different apps to answer five different conversations. It would make a lot more sense if you could–
Chetan Sharma 09:56
Does everyone seem to be fine with it?
Adreas Bernstrom 09:58
They are fine with it. So even if we see it as a broken loop, I don’t think the consumer does. They’re so used to moving between applications. You add in the next level which is that every single application could potentially set up their own little user base. Whether you’re a dating site or you’re a shopping site or you’re a car rental service you set up your own community where you have communications inherently in the application that you’ve pulled out from the cloud and you’ve just integrated in a cost effective and simple way. Then you’re also undermining the need for these larger networks. So I think there’s going to be erosion in all different areas and you’re going to get certin players who will become successful and they’ll get taken out and be part of the bigger organization. You’ll get other ones that will flounder, but they’ll still have a network and they’ll continue to provide some form of service.
Adreas Bernstrom 10:51
There’s a lot more content being done in the communication space. You’re looking at Korea and China and Japan where they’re actually using it as a distribution channel for proper content – selling games, they’re playing games with the network. The Western world is trying to adopt that. I’m not sure that we have the same kind of mentality. But that’s the idea. How can we use 200 million people to actually promote things, to distribute things. How can we maybe have snippets of movies where you’re showing trailers, or music? How do we get buzz around this? How do we get more engagement and users around it? I think you’re going to see a lot more of that as well.
Chetan Sharma 11:30
Mark, one of the discussions in industry has been OTT versus the traditional service providers. What are some of the collaboration models you have seen, or you are contemplating, to work with existing service providers who either might not be targeting a certain segment, a certain country, a certain geography. What are some of the successful models that you’ve seen that have worked with service providers.
Mark Lefar 11:57
That’s a great question. As you know I spent a lot of time on the wireless service provider side of the aisle. We’ve seen, in the last 18 months in particular, a number of large telecommuncation providers – many that provide wholesale services to tier two and three carries – who’ve come to us and asked for support. Can they use our white label version of our app to be able to bring that to companies that may not have international long distance business. They may have very segments, they want to use that to disrupt pricing in a given marketplace or a given segment. They’re actually using it as part of their toolkit for their wholesale teams to go sell to tier two and three carriers.
Mark Lefar 12:35
We’ve seen some announcements lately. T-Mobile here in the US has talked about an openness to over-the-top providers. How they’re really going to bring that to the fore, and how they’re going to partner with folks. Will it be on a revenue share basis or to actually license software? There’s skill sets that you’ve got enough skilled over-the-top providers that provide a quality service it makes more sense to partner than to try to create on their own. I think there’s some cultural gaps that exist in the carries that make it easier for them to potentially partner–
Chetan Sharma 13:09
Having worked at Cingular and AT&T and now being on the other side, what would you recommend to the service providers in terms of how they build their technical architectures and business models around OTT
Mark Lefar 13:22
Well, I’ll hold off on the technical architecture and talk more about the business segment. If they segment their business I think that they will realize that there’s large portions of the business where they have an opportunity to bring over-the-top under their own brands or co-branded that shows that they actually understand what customers want without jeopardizing the large revenue streams that they’re historically trying to protect. I also think they need to take a pretty long term view of where’s it really going to end up over the next three to five years.
Mark Lefar 13:58
There’s an old saying that if someone else is going to cannibalize you you might as well eat your own young before someone else does it for you. I think we’re at that point now where some of the carriers, particularly relative to messaging; that’s already played out. But there’s still an awful lot in video, international long distance, multimodal – doing things across multiple devices that aren’t traditional wide area connected devices – where I think there’s an opportunity for them to expand and even perhaps charge higher prices to extend their application from their mobile phone onto other devices in a connected way. I think there’s some interesting opportunities where they can protect revenue, maybe even create some new revenue streams.
Chetan Sharma 14:38
One of the areas that interests me is payments. Once you have the community, why not enable that community to do more than just communications? Payments seems to be tailor made for that community. Since they’re talking to each other, they’re likely to exchange money as well. What are the advances in that space especially in light of some of the regulatory challenges in transferring of money across borders?
Adreas Bernstrom 15:06
We’ve just launched a service that allows you from a Rebtel wallet to send money to any prepaid phone in the world. And obviously because you’re sending money into a closed sim it’s not regulated in the same way. But I think if you look at the relationships that operators have with subscribers they have a lot of strength or a lot of value in actually understanding that that person has given a credit card over and how do we actually manage that relationship? I think from an operator’s perspective they could use a lot of OTT knowledge to be able to actually package that in an extremely efficient way and be able to provide other services to them.
Adreas Bernstrom 15:43
In the same way that you see ILD moving from the high street onto applications, you’re seeing the same thing done in remittance. Obviously with the digital modal, digital distribution you have a fraction of the cost base. I think remittance is one part, but actually being clever about mobile wallets and learning from– We’re doing some work with Ampacer in Africa at the moment – how we can then integrate into their wallets to be able to send money to them. They’ve taken a step away from cash and credit cards and gone straight to the fact that everybody’s got a phone with them, it doesn’t need to be 3G, it can be over the GSM network, and how do we actually use that for currency? My belief is that operators have a really, really important role to play there and could make real value out of it. But I’m not seeing a huge amount of innovation. It’ll be interesting to see if they could partner with certain– In Europe you’re seeing quite a fair amount of partnerships between operators and OTT players. You’re seeing Spotify, iZettle which is Europe’s answer to Square, where you’re [targeting?] the distribution and the operator is getting a factor of cool stickiness and a reduction in charm. That’s a good relationship, but I think innovation can actually add extra revenues rather than just try to maintain the ones they’ve got.
Mark Lefar 17:01
I think the question should be where’s it going to start first? What’s going to start the fire? One of the hard things about mobile payments is for you adopt a given type of mobile payment it’s got to be nearly ubiquitous. Until you can actually leave your wallet at home, it’s hard to make that shift. I think some of the stuff that Andreas is doing is interesting. My personal belief is that there’s a fundamental habit where those that have relationships with people in other countries where they are living in the country making the wage and this whole idea of money transfer and sharing that back to family back home and doing that via the phone is going to be where it’s going to start. Because that’s a habit that customers are already doing. Look at the Filipino market in the US. The percentage of Filipinos that actually send money on a regular basis back to family and friends in the Philippines is over 75%. I think we’re going to see that those will be these initial fires where it’ll become increasingly acceptable and a normal practice, and the customers are going to start to demand the ability to actually use that money transfer more broadly. But I think the broader mobile payments marketplace is still a long ways away from being generally accepted. I think we’re a decade away.
Chetan Sharma 18:17
We have just a few seconds left. Just a quick question around. In 12 months timeframe, do you expect more than seven, eight players to be above 20 million subs or less?
Adreas Bernstrom 18:30
I think there’ll be more.
Mark Lefar 18:32
I think there’ll be more, and I think half of them you haven’t heard of yet.
Chetan Sharma 18:37
Well, with that I think we’ve reached the end of our time. Please join me in thanking Mark and Andreas.
Announcer 18:46
Alright kids, it’s lunch time. We hope you enjoyed the morning sessions. Go! Eat some lunch. Meet some people. Say hello. Network. Visit the exhibit area, the sponsors. We love them. Go tell them that we love them and tell them that you love them. Go to GigaOM Research, see what kind of cool stuff is going on there and get smarter than the person next to you who doesn’t go there. Refreshments are located around; grab a boxed lunch. The caprese salad sandwich was pretty good – a little bready – but the turkey lime one looks really good. General session – we’ll start again at 1:35. See you then everybody!
Audio 1 19:23
Those were the pioneers.
Audio 2 19:24
More mobile is the generation I’m in.
Audio 3 19:26
This whole generation that I come from it’s a hell of a generation.