Dancing to the beat of a different drum

Dancing to the beat of a different drum Dominic Smith looks at the differences between CSPs and over-the-top (OTT) service providers, and finds that publicly listed companies are at a significant disadvantage when it comes to innovation.

The telecoms industry is now dominated by stories of the latest and greatest over-the-top (OTT) services and how these will be the final nails in the coffin of the traditional communications services provider (CSP) business model. Whether it’s the demise of SMS revenues as a result of OTT messaging platforms such as Facebook Messenger and WhatsApp, or the growing number of customers ‘cutting the cord’ and watching movies through the likes of Netflix and LoveFilm, how to compete with OTT providers is pretty much at the top of the list of challenges for most CSPs, and this was a constant theme throughout the recent Management World 2012.

But what is it about OTT providers that make them the new darlings of the media, and why do CSPs struggle to match their innovation?

Firstly, we have to look at the different company cultures and I don’t think I’m being too harsh when I say that most CSPs, and certainly the larger incumbents, are not particularly dynamic. It seems to take far too long to make any substantial changes to their businesses, with many hamstrung by regulation and the sheer size of their companies putting them at a significant disadvantage.

Contrast this with the agile OTT start-ups that are light on their feet, not constrained by regulation, have minimal overheads, and a product that usually sells itself and spreads virally through a loyal user base that advocates the service. And while many OTT providers don’t seem to need any kind of advertising budget, CSPs continue to spend millions every year on advertising and corporate sponsorships.

Of course we are not comparing apples with apples. CSPs are complex and mature businesses often offering hundreds or even thousands of different product and service options, and with a large investment in infrastructure which requires many people to operate, upgrade and maintain. Whereas OTT providers are growing up with perhaps only one or two main offerings with a couple of different packages at best. Also OTT services for the most part are purely software-based, so don’t require teams of field engineers to deal with the physical infrastructure.

Furthermore, traditional telco-services are feats of engineering with interoperability, ‘five 9s’ availability and carrier-grade performance all core requirements before a service is launched. Seemingly no stone is left unturned in the quest for engineering perfection, prior to finding out if the market is ready or needs such a service.
Compare this conservative approach from the CSPs which stifles innovation, with the OTT culture of launch it, learn from it, improve it, and be prepared to start again if you have to. This iterative approach to innovation is at the heart of OTT businesses; you could say it’s part of the start-up DNA.

But perhaps one of the biggest constraints for CSPs is that of being publicly traded companies. Whilst a company is at the mercy of the financial markets, it lives and dies by the results it achieves, quarter by quarter. And this seems to be the biggest inhibitor when it comes to innovation. How can a CSP try to be more dynamic and innovative, when the fear of failure is so great? Miss your targets for the next quarter and heads will roll, it’s as simple as that.

I’ve previously argued that partnerships between CSPs and OTT providers should be the way forward for the industry, and I do firmly believe that CSPs and OTT providers can complement each other very nicely. However, whilst CSPs may think OTT providers are dancing to the beat of a different drum, perhaps there is something more that CSPs can learn about innovation from their OTT counterparts?

Arguably most innovation today comes in the form of software, so perhaps if CSPs can become more IT or software centric they can mimic some of the success of the OTT providers? This doesn’t necessarily mean building more software themselves, but working with vendors and putting software at the front of the business strategy rather than just using software as ‘support systems’ for an engineering-led operation.

Another key evolution must also be to reduce the complexity of products and services, and make it easier for both business and personal users to understand the value of their packages. This means that CSPs must also be prepared to retire end-of-life products and simplify their portfolios, rather than maintaining them at all costs for only a handful of users.
And finally, perhaps freeing the visionaries from the shackles of a highly regulated business that is governed by quarterly targets will create an environment that stimulates innovation and creates the new ‘big thing’ for their business. We’ve already seen Telefonica steal a march on the other global CSPs through the creation of Telefonica Digital, and surely we will see more CSPs go down a similar path in the near future.

Whilst OTT providers may have become the darlings of the media, the recent woes of Facebook put into perspective the fragility of the OTT business model, and perhaps CSPs are on a stronger footing than they have been led to believe. The transition from start-up mode to established business is not always smooth, and Facebook has taken a battering since its high profile IPO, with shares already trading down 30% after just 3 weeks.

Becoming publicly listed necessitates much greater transparency over your finances, and results in even greater scrutiny of your business model. Facebook may well recover and go on to greater things; but for now, I’m sure there’s more than one CSP out there who’s rather glad to see Zuckerberg and the rest of the OTT sector knocked down a peg or two.

Image via Wikimedia Commons