Business disruption in the telecommunication market – a five forces analysis on OTT

I was inspired by an article I recently read on computerworld.com, which explained how digital business disrupts the five forces of industry competition.

The “Five Forces” model was developed by Harvard’s Michael Porter and describes the rules of competition as represented by five forces: the entry of new competitors, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers, and the rivalry among the existing competitors. Strategy consultants commonly use this approach to analyze a firm’s strategic position within the competitive market.

So how do each of the five forces impact a carrier’s or cable company’s business with regards to over-the-top content (OTT)?

Entry of New Competitors Threat

OTT dramatically lowers barriers to market entry. Historically, entering the carrier market has required massive investments of capital and resources in proprietary technology. The existing carriers had major cost advantages stemming from their roots in governmental institutions. As a consequence, market regulation dissuaded new participants from entering or competing. The advent of OTT is flipping this situation on its head because new market entrants are mostly free of legacy trappings and of public service obligations. Brand loyalty has largely weakened and is now a thing of the past. Not only are carriers forced to combat the issues of churn between themselves, but are also behooved to introduce alternatives to OTT services to ensure their own survival.

Technology Substitutes Threat

TCP/IP based infrastructures bring cost savings to the carriers and also allow them to abstract key value added services from the physical layer. But substitutes are also being built on top of the IP protocol, commoditizing the incumbents’ own infrastructure and services. Today we find OTT-based substitutes for all core offerings. Voice communication is being threatened by SIP and proprietary offerings (e.g. Skype) and by asynchronous voice messages (e.g. WhatsApp) that are very popular among millennials. Traditional DSL broadband, which has enforced “customer loyalty” in the past, is seeing growing competition from TV-cable as well as from wireless technologies such as LTE and future 5G networks. Cable TV companies are faced with the threat of fast growing IPTV and VOD offerings, often contending for budgets (ads and subscription) and for customer attention (viewing time.) Even mobile businesses are being threatened by the growing number of market participants offering IP based alternatives to text messaging and to traditional long distance calling.

Bargaining Power of Buyers

A growing number of competing offerings are moving power into the hands of buyers (subscribers). It is imperative to also recognize that the growing number of subscribers and their behavior patterns for where, when and how they access services are getting harder to predict. Generally speaking though, a broadly consumed set of services and the rapid introduction of new services will essentially change the rules of the game to favor customers.

Bargaining Power of Suppliers

OTT and IP based solutions are usually being built upon modular architectures and open standards. This is the agile world of cloud computing that allows the service provider to move away from locked-in vendor relationships. There is a growing number of suppliers and integrators, but the openness, modularity and agility requires higher willingness to accept risks and responsibility.

Rivalry Between Existing Competitors

A new breed of OTT based competing products are fueling the competition and creating disruptive changes in the markets. These new market entrants are often much smaller, more agile, unencumbered by legacy constraints and typically enter into markets with minimal regulation.

Traditional service providers also have the opportunity to embrace OTT and combine it with their own unique value propositions. Video traffic, especially for 4k and UHD demands, will soon hit the bandwidth limitations of the Internet infrastructure. A suggested approach would be to employ virtual CDNs and to also move the content caches, transcoders and storage to the periphery or “edge” of the network. A vCPE (virtual customer premise equipment) solution may also be offered with quality controlled service and enhanced security in conjunction with the physical layer. Furthermore, network service providers own the physical network and have a distinct advantage over their cloud service provider peers. This distinction is nontrivial because of the profound impact it will have on the agility in the new world of a carrier’s business.

PS: Thanks to Narendra Narang and Pano Xinos for reviewing and editing.

Please follow me on LinkedIn and Twitter @wgold_de.

 

  1. MNO/MVNO are becoming “just a pipe” for connecting the subscriber to the content (OTT) which usually sits in the cloud. Roaming ?! No way! I am using Viber via WIFI or I take a local SIM card.
    OTT vendors and their applications have evolved over the past few years. Skype, Viber, WhatsApp , Facebook and others , have managed to significantly improve its functionality and user experience. Combined with omnipresence of free WIFI internet access , OTT solutions have become a viable alternative to traditional MNO/MVNO offering.
    The minor disturbance has become, well – disturbing – at least to some carriers. The modes of disruption have been aided by several key trends, in no particular order:
    -Open enough device operating systems – Android and iOS
    -More afforable data tariffs and speedier internet connections
    -Dramatic lowering of barriers to entry for internet platforms of all kinds
    -Consumer behavioural changes
    -Increase in carrier inertia preventing timely responses to OTT threat
    The digital revolution is all taking place via software, up and down the stack – from new database technologies, through new operating systems, all the way up to the apps, which are mostly the tip of the software iceberg that the carriers are crashing into. Nonetheless, the band keeps on playing on the deck and the porters keep shuffling the deck chairs in vain, yet well intended, attempts to innovate. But most of this will come to nothing and the OTT guys will triumph until carriers realize that having software DNA is a necessary condition for innovating in the world of digital services that many carriers believe they occupy. This too, is an inescapable fact.

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