IDC: Changes of the Communication OTT Market Revealed by the Dispute on “Charging for Wechat”

Speculations that Tencent may be charging for its instant messaging service Wechat has recently triggered widespread concerns in different sectors of the society.

IDC believes that the popularity of communication OTT (Over the Top) applications such as Wechat is because they provide inexpensive voice and messaging service; and provide users with richer communication experiences.

The decision to charge will affect the transformation pace of the industry to some extent, instead of inhibiting people's pursuit and use of richer platforms of communication.

So far, industry regulation (including information monitoring and blocking; and additional fees) is the biggest uncertainty in the development of the communication OTT market.

IDC forecasts that, within a certain period of time, the regulatory authority may restrict the excessive development of the OTT market through administrative measures (for example, extra charge and regulatory policies), in order to reduce its overwhelming impact on the traditional telecom business.

Whether it is to respond to the impact of OTT’s replacement on their businesses, or to compete for the "important entry" to mobile Internet, telecom operators will stick to the strategy of supporting and developing their own OTT applications, and build thereupon their own mobile Internet service systems.

IDC believes that in the short term, carriers may gain more bargaining power by excavating the value of the Smart Pipe, while in the long run, only the enterprises (or cross-industry alliances) which give users better communication experience can win in this round of reform.

Current development status of communication OTT

Communication OTT are applications or services which provide users with video, voice or message by using basic network resources of telecom operators and through PC programs or mobile apps, including WhatsApp, KaKao, KiK, Skype, QQ and Wechat.

Communication OTT services have gained popularity among users as they are free to users, who only need to pay a small fee (broadband or mobile phone traffic charges) for the communication services which are similar to voice, SMS or MMS.

From a global perspective, the development of OTT business continues unabated. Besides early OTT service providers such as WhatsApp, Skype, KiK and KaKao, more competitors with client resources are emerging in the industry. They include iMessage and FaceTime from terminal manufacturer Apple, Google talk from mobile phone operating system provider Google as well as “Libon” from telecom operator Orange. Facebook, the world’s largest social network platform, is also trying to launch its own IP voice service, Facebook Voice, lately.

From the perspective of product value, OTT applications today are no longer limited to early voice or messaging services with tempting prices, but can better meet people’s new communication demands such as mobilization, socialization and localization.

With the development of smart terminals and mobile Internet, the mainstream way of communication is changing.

According to IDC’s latest survey on the use of smart phones in the US, the top three ways of communication in the US are SMS (49%), call (43%) and messaging through Facebook (40%). This shows that the mainstream way of communication is transforming from the traditional voice and SMS to more varieties, and the growth of Wechat is probably because it meets people’s new communication demands.

Reasons for the dispute

When taking an overall look at the OTT dispute, we can see that the main issue is having too many network resources involved. Since China Mobile’s networks mostly range from 2G to 2.5G (GSM, EDGE, etc.), and the current core network is not designed to support IP transmission, it may be valid that 60% of the signaling resources are occupied.

However, considering the trends of technology evolution, such contradiction can sooner or later be solved by technical means. Theoretically, the IP-based 4G LTE (VoLTE) can better host OTT applications. Therefore, Wechat is a growing threat for telecom operators.

Such threats are not only from the business replacement by OTT, but from the loss of a fast-growing number of users and the “important entry” to mobile Internet.

China Mobile, with a market share of 63.9%, only had 710 million mobile phone users by 2012 (China Mobile 2012 Annual Report), while the number of Wechat users climbed to 300 million in less than two years (Wechat’s official account on Tencent Weibo, January 15, 2013).

At the same time, communication OTT is one of the “important entries” to the mobile Internet era. The operators have been actively deploying the mobile Internet business since the early period of 3G.

Without the “entry”, they might continue to be “piped” in the mobile Internet era. On the other hand, in view of the current situation, the threat of Wechat being a replacement of the operators’ primary revenue sources is more urgent.

Taking China Mobile’s revenue structure in 2012 as an example, the revenue from SMS and MMS accounted for about 26.58% of the total (China Mobile 2012 Annual Report). Despite growth of such businesses, they are very likely to be replaced by Wechat and other OTT applications in respect to the functions.

Market changes after the dispute

So far, industry regulation (such as information monitoring and blocking; and additional fees) is the most direct solution of telecom operators, as well as the biggest uncertainty for the future development of the communication OTT market.

According to international experience, the regulatory authority will reserve room for differentiated traffic charge of operators in the mobile business (such as the US “Net Neutrality Rules”), but due to the pressure from the public and peers, it is not common for the operators to make extra profits in practice. Google used to pay France Telecom an extra fee to make sure of a higher service level for Google service users.

Based on official comments from the Ministry of Industry and Information Technology (MIIT) and an analysis of interests of all parties, IDC forecasts that within a certain period of time, the regulatory authority will restrict the excessive development of OTT applications through administrative measures (such as extra charge and regulatory policies), so as to delay its impact on the traditional telecom business.

The reasons are as follows: Firstly, China’s security supervision for OTT communication is not sound enough, and excessive development may lead to potential social safety hazards.

Secondly, the basic network construction of China still needs positive inputs of telecom operators, it is necessary to prevent an early profitability deficiency of operators.

Finally, telecom is a national pillar industry with a huge number of practitioners. Even if the trend is irresistible, the regulatory authority will do their best to slow down the pace of reform, so as to reserve more buffer time for the industrial transformation of operators.

After the dispute, it is safe to predict that the telecom operators will accelerate the business transformation, and make deeper reflections and researches on how to meet people’s communication needs.

Even regardless of the operators, the communication OTT market would never be peaceful. There will be a new round of competition among strong enterprises on every link of the ICT industry chain, with social platform providers, terminal vendors or search engine providers attempting to seize the important “entry” of ”communication”.

The operators with the pipe strength are likely to strengthen the cross-industry cooperation with non-interest parties, so as to establish richer and more comprehensive industry alliances that can challenge the industry leaders. In the long run, IDC believes that only the enterprises (or cross-industry alliances) which give users better communication experience can win in this round of reform.

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