Well, here’s a surprise. Four major European telcos (DT, Orange, Telefonica, and Vodafone) plan to create a joint venture that’s aimed at attempting to address their “disintermediation” and “profit-per-bit” problems. EU operators have already asked the EU to approve traffic subsidies for telcos by the OTT giants. Is this latest JV an indication that the telcos believe the EU won’t approve subsidies, that they believe the subsidies aren’t enough, or that they believe that there really are underlying technology issues that telcos need to address to be profitable?
The JV aims at creating a platform for digital advertising, based on the generation of a “pseudonymous” token that would be specific to a given OTT website. The token would identify the user without revealing personal information, and because there would be a unique token per website/OTT, it wouldn’t be possible to profile the user by combining cookie data. All of this seems directly linked to EU data protection and consumer protection requirements that are aimed at preserving the privacy of personal data.
There’s no question that user identification is a viable mission for a telco or telco JV. Knowing the relationship between a user (as a consumer) and the user’s connection to the Internet is surely the most reliable way of creating an online identity. Similarly, telcos are already charged with (and regulated for) responsible protection of consumer data. The concept, in fact, has already been in trial by DT and Vodafone in Germany, in mobile network applications. However, the article I referenced questions whether user concerns about privacy could derail the initiative. I doubt that, but I also think there are both positives and negatives about the JV’s ability to impact operator challenges.
Let’s first be hopeful. I’ve noted in past blogs that AT&T had raised the idea of operators offering “facilitating services”, which would be services that facilitated OTT behavior without actually creating a direct-to-consumer OTT offering. OTTs would then pay for that service set, and those payments would raise profit per bit. This initiative seems to be an example of such a facilitating service, likely the very first to be offered, and so it’s a potential prototype for further development in the space.
To be workable, a facilitating service has to have two primary properties. First, it has to have the potential for adoption by sufficient OTT mass to actually generate a useful revenue stream. Second, it has to be defensible against OTT competition from players who might elect to do the same thing on their own, or band together to do it collectively. The JV target might meet these goals.
Getting a piece of the ad dollars seems, in the surface, a reasonable way to address both these property requirements. Certainly there are enough ad-sponsored sites and services out there, and there seems little chance that the OTTs in the space would somehow be able to mount their own credible counter-strategy. But there are some “howevers” that we need to consider.
The first is the linkage between the telcos’ problem with differentiation and the JV approach. The great majority of traffic that’s threatening telco profit per bit comes from video content. Yes, much of the content includes advertising, but is the potential revenue from that source proportional to the traffic and operator cost associated with content delivery? Is the strategy also aimed at things like social networking, which may generate less traffic? A disconnect here would pose a risk that regulators would push back.
The second, and broader, question is whether something designed to protect user privacy can really facilitate anything at all for an OTT. Online ads are better than broadcast ads because of targeting, which presumes that the ads rely on knowing something about the user. While a token might anonymize the user in a personal sense, might it not have to reveal personal data without revealing identity? If that’s the case, what happens when the user has a relationship with the OTT (like a streaming subscription) that necessarily reveals identity? If personal information is really significantly more protected by the scheme, then ad targeting is hampered and the value of the JV would depend on the cost of sustaining another solution to privacy management, versus that the JV would offer.
The JV then may be one of those “not-the-beginning-of-the-end-but-the-end-of-the-beginning” things. It could demonstrate that telcos are willing to look hard at facilitating services, cooperate to provide them in a way that would be competitive given market drivers, and credible as sources. That’s a good sign IMHO because I think facilitating services are the key to improving profit per bit in the near term. But I also think this particular service is more a tactical response to regulatory policy evolution than a long-term revenue model.
Tactical responses are dangerous ground for telcos, whose inertial behavior is legendary. Only governments move slower, which is why the JV target could be reasonable in terms of speed of availability. It’s durability I’m concerned with. The biggest opportunities for facilitating services aren’t tactical.
What makes a facilitating service durable is a long-term barrier to competitive entry, and since “competitive entry” would be most likely to come from the OTT side of the game, it’s those OTTs we’d want to keep out. Having OTTs share a third-party (telco, in this case) facilitating service limits their differentiation, so there has to be enough of an offsetting barrier to their rolling their own service instead. It’s hard for me to see such a barrier outside a financial one.
Why could a telco get into a service an OTT could not? Because a telco, as an effective public utility, has a very low internal rate of return. Roughly speaking, the IRR is the ROI level below which investments will actively hurt a company’s financials. Because of their low IRRs, telcos can get into stuff that OTTs typically could not. Telcos could also likely fund positioning investment in infrastructure out of cash flow, which most OTTs would be reluctant to do.
All these plusses have to be balanced against the basic truth that the telcos can’t do facilitating service without a strong notion of what OTT activity they’re proposing to facilitate. If you look at the 5G space, you can find ample proof that rather than having their eyes on the OTT clouds of consumeristic demand and opportunity, telcos have their eyes on their feet. Somehow, they believe, saying just the right thing about stuff like 5G SA or network slicing is going to stimulate a whole market to seek out ways of exploiting that stuff, despite the fact that there’s no global scope for these capabilities and few OTT services that don’t demand global scope.
That raises the final issue, which is “feature federation”. A single telco like AT&T can surely create a facilitating service if they extend themselves, but would that single feature, sitting in the midst of a global feature desert, induce OTTs to rely on it? Even something like the proposed JV does nothing more than make the inadequate footprint of a facilitating service a little less inadequate, which is a long way from being adequate, credible, or compelling. How do you share features across operator boundaries the way we’ve shared connectivity in the past? There is no good answer to this today, and I think that telcos like those promoting the JV need to be thinking about working on something in that space. I know from past experience it won’t be easy and it’s likely to take a while. Meanwhile, OTTs may develop their own “facilitating services” and then it will be too late.