Content providers and Telcos

Content providers and Telcos

The Delta Perspective

from parasitism to symbiosis

Radical changes are sometimes triggered by anecdotic events. The following could be one which holds major implications to the telecom industry. Last week, during a non-prime time interview on a second tier French TV channel, Stéphane Richard, the CEO of France Telecom, subtly mentioned that the traffic generated by Google, among other online content providers, was monetized by Orange and evidently by other carriers as well.
 
Although Google has not disclosed nor denied this during their 4Q12 results presentations on Tuesday (interestingly enough, no analyst raised this point during the briefing), this assertion could have a tremendous impact on both the online content providers and the operators. As a matter of fact, the usual hostility between both parties could evolve into a collegial partnership that benefits both.
 

What’s in it for Google?

For telecom operators, the rationale is comprehensible; Google and other content providers generate a considerable amount of traffic on operators’ networks, driving them to deploy new technologies and enhance their infrastructure to cope with the surging traffic. Stéphane Richard has actually mentioned in the interview that Google’s portfolio of websites was responsible for over 50% of Orange’s global data traffic.
 
The rationale to compromise is less obvious when it comes to giant online content providers such as Google, but it is likely driven by three elements: Platforms, Geographies and Revenue Share models.
 
Rationales for monetization agreement between content providers and telecom operators:


 
Platforms: Over the past years, Google has been pushing aggressively to increase the penetration of Android-equipped mobile devices in order to monetize their usage. With 72.4% market share of worldwide mobile device sales during 3Q12, Google’s OS supremacy is unchallenged. Establishing partnerships with telecom operators by offering subsidized devices with pre-installed Google apps to end users is certainly a way to maintain its global leadership, especially in underpenetrated emerging markets. While you can argue that the quantum of subsidy may be complex to define, we see an emerging trend of content providers wrestling for the control of devices (e.g. Facebook phone and China’s Xiaomi phones) – adding further complexity to the situation.
 
Geographies: The appealing access to emerging markets is another strong rationale for large content providers to establish ‘symbiotic’ relationships with carriers. Current internet penetration in Africa is about 16%, four times less than in Europe and five times less than in the US. However, we estimate that by 2016, the number of people having access to internet in Africa will triple. This is reason enough for global content providers to reach a compromise with large carriers to guarantee full support in the continent (e.g. Orange Africa’s footprint commands over 70 million subscribers). Google may well be rolling out fibre services branded as Google Fiber in the US but this is unlikely to happen in emerging markets.
 
Revenue Share: Besides pushing for specific devices, operators have the ability to prioritise traffic in order to (1) push specific content or (2) to design specific offers with service-driven tariff packages (e.g. Facebook, YouTube or WhatsApp packages). A revenue-sharing model with content providers makes mutual sense in these cases. While this goes against the spirit of net neutrality, the reality is that emerging market regulators have so far not put a tight grip around this topic, allowing below the radar deals such as the one between Orange and Google to happen.
 

What are the implications for telecom operators?

While we wait for more details about the deal to be released, possibly when Orange announces its FY12 annual results in February, we can already contemplate some implications of such agreements for the TMT industry.
 
This sort of agreement with content providers is a good data monetization opportunity for telcos. How much value the telecom operator can extract out of it however, will depend on who has the bargaining power and what is the engagement/collaboration model.
 
For instance, big players such as Google would preferentially target operators with solid infrastructure, good data value proposition and strong presence in emerging markets. Clearly, the size and geographic reach of these operators are appealing to large content providers. As such, it is likely that agreements will happen between large telecom groups in the first place, hence giving the edge to telecom groups with a significant size and geographical footprint.
 
Charging mechanisms are still unclear, but can be carried out on a wholesale basis given the amount of traffic that content providers generate on carriers networks. Another model would be based on a revenue-sharing agreement between the operator and the content provider. In both cases, establishing an exclusive agreement with a specific telecom operator will be a major advantage for a content provider, as operators will be tempted to strike deals with several content providers in a given market.
 
The size of these deals is not expected to contribute enormously to operators’ revenues. However, in addition to the new ‘wholesale’ revenue stream, operators could generate further revenues from providing QoS-based offers where subscribers can enjoy better access to specific content.
 
To sum up, operators and content providers are urged to re-think their relationships as interdependent, rather than competitive.
 
While regarded as a small step for Orange (as underlined by Stéphane Richard), it could be the defining moment of a giant leap for the industry. Further revelations by other operators in the coming months might provide additional answers.
 
4. Wireless Intelligence
6. TelcoSector_Asia_i13 Series-How to deal with OTT Challenges_Nomura_14Jan13
8. Orange boasts: We made Google PAY US for traffic, The Register, 17th January
9. Orange 'forces Google' to pay for mobile traffic, AFP, 18th January
10. Why Orange's Dominance in Africa Forced Google To Pay For Traffic Over The Mobile Network, Forbes, 20th January

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Delta Partners - TMD Advisory and Investment