Facebook’s acquisition of WhatsApp reflects communication space reality

Facebook's snapping up of WhatsApp for $19 billon reflects what is happening in the communication space with telcos being slowly edged out by over-the-top players who are establishing themselves as the go-to service for our communication needs.

Facebook, the world’s largest social network, acquired WhatsApp for as much as $19 billion in cash and stock. Chris Ratcliffe / Bloomberg News

Last Thursday the world woke up to one of the biggest acquisitions in the technology domain – Facebook snapping up WhatsApp for US$19 billon.

To understand the rationale behind this eye-popping price tag, it’s important to look at what is happening within the communication space overall.

Traditionally, telecoms operators have dominated this space through phone calls and SMS. However, the tables are now turning and telcos are being slowly edged out. Increasingly, over-the-top (OTT) players are establishing themselves as the go-to service for our communication needs. Examples include WhatsApp, Line, iMessage and WeChat for messaging and the likes of Skype and FaceTime for video calling.

According to Portio Research, OTT messaging has now overtaken peer-to-peer SMS, and by the end of last year, OTT applications were estimated to account for 28.6 billion messages daily compared to 22.4 billion SMS that were being sent per day. Free social-messaging applications like WhatsApp – the clear leader with more than 450 million monthly active users – cost phone providers around the world $32.5bn in texting fees in 2013, according to research from Ovum. That figure is projected to reach $54bn by 2016.

However, looking at the bigger picture, OTT use is not just restricted to calls and messages – it spills into media consumption (such as YouTube, Spotify), peer networking (Facebook, LinkedIn), cloud storage (Dropbox, iCloud) and many other functionalities.

YouTube is responsible for 82 per cent of all mobile traffic on video entertainment sites while Skype usage is equal to one-third of all international phone traffic. The scale makes it difficult for telcos to compete on an equal footing.

One of the chief reasons that OTT players have flourished is that they have developed services that address key customer needs in a simple and efficient manner. They provide low-cost (often free) services which not only work cross-platform and cross-operator, but cross-country as well, offering a homogenous experience no matter where the user is.

Further, they have received a boost from the growing penetration of smartphones and the continued development of the application ecosystem on popular operating systems such as Apple's iOS, Google's Android and Microsoft's Windows. Being cross-platform makes it easier for OTT players to reach a large number of users globally, and in quick time, whereas, telcos are restricted only to their markets.

The telcos’ response towards the OTT threat has varied from denial, to submission, to now, increasingly, partnerships. While just a few years ago, operators were unwilling to even perceive the OTT threat, they are now either competing directly by launching their own OTT-like products or partnering with the established OTT players to remain relevant.

Prominent examples of operator driven OTT-like solutions include Telefonica’s TU Me and TU Go services in Spain, T-Mobile’s Bobsled platform in the United States and Orange’s Libon application in France. All these services offers free talk and text functionalities. This direct competition approach is aimed at drawing subscribers away from established OTT platforms and prompting higher on-net interactions, as well as, fostering an engaged community to entice potential advertisers.

However, it’s the partnership approach that is really gathering momentum. This strategy aims to leverage on the popularity of OTT applications and monetise through subscriptions. Examples include the alliance of Verizon with Skype in the US, KDDI with Line in Japan and 3 Hong Kong with WhatsApp.

A telco-OTT alliance has several benefits. In the short term – with operators charging a small premium for providing access to OTT applications – this strategy boosts ARPU (average revenue per user). Take for example the case of RCOM (Reliance Communications) in India that provides unlimited WhatsApp access for 16 rupees (94 fils) a month. It’s overall ARPU is only 119 rupees so a WhatsApp package subscriber’s ARPU is 13 per cent higher. Taking a long-term view, benefits that telco-OTT alliances bring include heightened customer loyalty, reduced churn and enhanced overall customer experience.

The situation within the Middle East region is also similar, where operators have tried to respond to the changing marketplace in a host of different ways.

In the UAE, Etisalat's eLife internet-protocol TV (IPTV) offering includes access to the company's OnWeb service that offers an OTT-like delivery of video content.

Meanwhile, its rival du has long been campaigning for the creation of a pan-Arab online social networking platform to rival the likes of Facebook.

Mobily Saudi Arabia has a partnership with WhatsApp allowing users to access WhatsApp at nominal rates. Similarly, STC has a partnership with Facebook in Saudi Arabia and Bahrain that provides discounted data access for using Facebook services.

And these are only a few of several such telco-OTT partnership services. As the world of OTT develops further, more such partnerships are likely to emerge, both globally as well as within the Middle East region. This will give telcos a chance to develop new engagement models that leverage on OTT momentum and help the telcos register gains for themselves.

These trends bode well for the end users – who are more likely than ever to receive better services at competitive tariffs.

Abhinav Purohit is a UAE-based strategy consultant specialising in the telecoms industry

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