Exploring OTT Revenue models for Telecom

Discover how having an OTT platform can set you apart as a telco, help you maximize profits, increase your customer base, and secure your place in the changing telecommunications landscape.

The telecommunications sector is undergoing rapid changes as the industry grapples with constantly evolving technology, declining revenue streams, and competition from OTTs. Once at the forefront of the digital revolution, many telcos are finding that some of their services are becoming redundant in the growing wave of content platforms. In the past few years alone, Fortune reports that telcos have lost more than $386 billion to OTT platforms like Google, Skype and WhatsApp. As the communications environment continues to change, telcos must expand their services and offerings to compete with OTT providers and recover lost revenue. 

What is OTT?

Over-the-top (OTT) is simply the distribution of music, video, and other media across a collection of computers linked by their own internet protocol (IP) addresses, eliminating the need for traditional network providers. OTT has quickly risen as a challenger in the industry and is forcing many businesses to rethink their service provision strategies. ReportLinker estimates the value of the worldwide OTT services market to be nearly $118 billion as of 2021, and it is projected to rise to astronomical rates in the next five years. 

Previously, telcos operated with networks’ embedded communication services. Messaging and phone services operated in conjunction with a network-centric communication protocol, much like in the case of 2G or 3G networks. However, the rise of IP-based networks allowed service and network levels to be separated. This provided more support for the idea that telecommunication services may operate as an application supported by a broadband connection. Eventually, OTT came into fruition, where telecom services were delivered over both conventional and wireless networks.

Easy access to many different kinds of digital media and service enhancements is rapidly expanding. Consumers are increasingly being conditioned to having access to personalized content throughout the day as smartphone and other electronic usage is at an all time high. Due to the increased demand, OTT service providers now use consumer data to deliver relevant material and make content suggestions.

The Impact of OTT and the Need for Telcos to Develop Their Own Platforms

In addition to offering their own digital goods and services, telcos also act as catalysts for other industries by supplying the network architecture necessary for other industries to operate and develop in the digital marketplace, which in turn drives up consumer interest in internet services. It is anticipated that over the next several years, both the number of online clients will rise globally, along with the amount of time spent on online communication platforms. While aggregate digital traffic is predicted to increase, consumer spending on conventional communication services is expected to decrease due to shifting consumer behavior. As technological advances quicken, many new challengers are breaking into the primary telecommunications sector. These businesses are often run by tech-savvy individuals who grew up in the age of technology, so their content and marketing strategies are not only more novel, they are in sync with what the modern consumer wants.

These new companies founded by digital natives are providing the same essential phone, texting, and video calling functionalities that were formerly the sole purview of conventional telecoms. Particularly, OTT competitors like WhatsApp, BOTIM, Apple’s iMessage and Facetime and Zoom pose a challenge to established products by displacing them with cutting-edge, user-friendly, and even more alluring online communication platforms. 

Users can avail these service offerings for a significantly cheaper cost than what traditional telecommunications companies can provide, since OTT models rely on contemporary business methods. A McKinsey report estimates that by 2027, expenditure on conventional phone and internet services will decline by 36%, subsequently propelling established telcos to the periphery of communication service offerings. In order for telcos to keep up with audience trends and avoid becoming redundant, the need to adapt to this new challenge and consider investing in Telco OTT service bundles has never been greater. 

Alternative Solutions for Telcos

As operators face a growing number of threats to their revenue streams, considering alternative solutions is imperative.

OTT Bundles

The idea behind OTT bundles is to help telcos increase revenues by grouping several services together in a ‘package’ for consumers, providing greater value for money. These often combine telcos’ broadband connections and traditional channel TV with OTT products. The combined delivery of content is becoming increasingly common among telecoms, as it gives customers greater value for their money. In return for using the telcos’ data packages and internet plans, customers are offered a free subscription to an OTT platform focused on entertainment material, like Disney+ or Hulu.

Partnerships with OTT providers

Collaborations with OTT providers can help telecommunications companies recover lost revenues and sustain traffic. However, this opportunity is not without cost. By entering these collaborative arrangements, telcos must forfeit control over pricing and other services. 

Thus, if you’re considering partnering with OTT providers, it’s important to make sure your business goals are aligned. The arrangement can help you increase engagement, drive brand loyalty, and grow your revenue, but only if you have a clear vision for growth. 

Creating Their Own Services

As champions of the core infrastructure for communication, telcos are in a unique position to compete with OTT providers head-on; by developing OTT services of their own. There are different ways to accomplish this; you might accelerate the process by acquiring an existing OTT services provider, or you might invest in the lengthier process of developing your own services.

Ultimately, creating your own services can help operators recover cannibalized revenue without forfeiting control. You can control the content, pricing, and other variables while keeping the entirety of the generated revenue. Telcos should not, however, take such a large financial undertaking without a solid technological foundation, sufficient development expertise, and market knowledge.

Exploring AVOD, SVOD, TVOD, and Hybrid Revenue Models

Telecom operators have different OTT revenue models at their disposal, each with its own pros and cons. AVOD (Advertising Video on Demand) produces profit by playing adverts as videos are being played, while the SVOD (Subscription Video on Demand) model asks users to subscribe to their streaming service to watch ad-free content. With TVOD (Transactional Video on Demand), customers pay only for the material they want to watch; they can purchase single movies or documentaries without necessarily having a subscription. Hybrid business models also incorporate several revenue sources, such as a mix of membership payments and commercials.

AVOD

Videos can be seen for free, however, advertisements appear at various points throughout the video. The content distributor then receives a percentage of the advertising revenue. The AVOD  model enables businesses to accumulate views and expand their reach through engaging video content. YouTube is the leading AVOD platform, but many other smaller websites, including news and entertainment websites, utilize ads to boost revenue. 

The biggest advantage of AVOD lies in the fact that it is free, reducing the friction to adoption. Therefore, AVOD will always be a well-liked choice for streaming music and videos. Users just need to view a brief advertisement, which can be tailored to their preferences or skipped after a few seconds.

SVOD

For a monthly fee, users are able to watch as much content as they choose, without any advertisements.  SVOD has emerged as the most profitable revenue generation strategy and accounts for the largest segment of the OTT industry, thanks to its easy-to-cancel membership plans and relatively low cost. The SVOD model is used by both industry giants like Netflix and HBO Max, as well as upcoming providers like Disney+ and Crave. Forbes reports that nearly 86% of all Americans are subscribed to multiple streaming services simultaneously. 

However, the short-term commitment and the flexibility to end a subscription at any moment makes SVOD revenues somewhat volatile and unreliable. To appeal to new users and continue engaging users, operators must constantly offer fresh and unique material, which is resource-intensive and costly. 

TVOD

The TVOD model allows users to choose their preferred content and pay a small fee to rent or purchase it, with unlimited playback. This model is particularly appealing to viewers with sporadic needs, e.g., people with a particular movie in mind. Additionally, these services typically obtain exclusive rights to the latest releases before SVOD platforms get access to provide TVOD users with exclusive experiences.

Additionally, companies can keep a less extensive collection than competitors when they have a specific audience in mind. Instead of raising the membership charges and losing out on prospective viewers, they can introduce a lower price because users pay per movie. However, having a consistent source of revenue might be challenging, since TVOD models may struggle with user retention and encouraging repeat purchases.

Moreover TVOD offers diminishing value for money for end-users as the volume of content increases. It’s reasonable if they were to, say, buy one or two movies, but the costs can quickly add up for larger volumes of content. When compared to a streaming service that offers unlimited watch time and thousands of options for around $12, TVOD options lose their appeal. 

Hybrid Revenue Models

Currently, several platforms use a hybrid model by combining multiple income strategies. Consider Amazon Prime (which is a hybrid TVOD and SVOD platform), where customers pay a monthly fee to access a collection of movies and shows, but they also have the option to pay extra to view the latest movies or documentaries. 

Conversely, YouTube combines AVOD and SVOD; it gives users the opportunity to watch content with adverts before and during videos, or to pay a subscription fee to access the ad-free version of the website, along with other premium features. Users can check out your content before committing to a payment plan, thereby increasing exposure and popularity. 

Is SVOD paving the way forward?

When you’re deciding which revenue model is best, it’s important to consider your business goals and target audience. What type of content does your target audience care for, and how niched down is the audience itself? What’s their willingness to pay? Many OTT services even combine two or more models to better serve business needs. 

To compete with OTT providers, operators must invest in establishing their own digital delivery platforms to develop independent offerings. Telcos can optimally capitalize on revenue opportunities by using an SVOD model or a combination of SVOD and TVOD.

SVOD is perhaps the most predictable model for scaling revenue. As long as customers keep their subscriptions, operators can expect a reliable stream of revenue. However, proactively investing in retention strategies is key to succeeding with SVOD models. 

Recover your cannibalized revenue with M.M.

If you’re interested in competing with OTT providers by developing your own OTT services tailored to your audience, we can help. M.M. is the digital transformation partner of choice for leading global telecommunications companies, offering expertise in enhancing and optimizing their existing services. We assist in developing OTT solutions that enable our clients to revitalize their revenue streams. Book a free consultation with us to unlock OTT revenue growth for your organization.

Author

Kay Jay

Director, Commercial Department at M.M. An experienced professional with a wealth of expertise in managing national and international accounts for programs and services. With a strong emphasis on cultivating and nurturing client relationships, Kay Jay excels in fostering and enhancing partnerships with clients and partners.

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