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'Over-the-Top' services: challenges for network operators

'Over-the-Top' services: challenges for network operators

9 July 2014

Telecom and cable network operators are under pressure throughout Europe. Companies such as Netflix, YouTube and WhatsApp are creating traffic on their networks and operators now face large costs to upgrade their infrastructure. 

These organisations distributing ‘over-the-top’ (OTT) content have two advantages over network operators: they can use the infrastructure without paying for it, and they’re not subject to the regulatory regimes that apply to operators such as Telefónica and Vodafone. 

At the same time, companies such as Amazon and Skype compete directly with these operators by providing alternative broadcasting, cable, telephone and messaging services. Plus fierce competition, lower revenues for voice and data services and overpriced licenses have hit operators’ profits. 

And the competition is growing: Netflix has announced plans to enter several European markets this year; Amazon’s ‘Fire TV’ set-top box will boost its media streaming services; and WhatsApp, which Facebook bought for $19bn, now has more than 450 million users.

Operators' need for new business models

To deal with this, some network operators have introduced new pricing models, either to: 

  • limit customers from using OTT services - eg by relating prices to use or 'fair use' data limits; or 
  • generate revenue despite heavy OTT use – eg by getting users to pay a fixed monthly fee regardless of how much data and messaging they actually use.

Other operators have developed their own services: 

  • to compete with OTT services – eg Telefónica’s ‘TU go’ or Orange’s ‘Libon’ messaging apps;
  • by working with OTT providers – eg E-Plus’s partnership with WhatsApp in Germany and Hutchison's partnership with Spotify in Austria; or
  • by buying or developing content – eg music and television streaming.

Telecom and cable operators are also joining forces to compete with OTT players by offering ‘triple-play’ services – with internet, telephone and TV through a single service. Vodafone has bought Kabel Deutschland in Germany, and Ono in Spain, for example, and in the US, Comcast bought rival Time Warner Cable for $45bn. 

Ensuring fair competition

But some telecom industry tactics have sparked controversy.

Studies commissioned by the European Commission indicate that some network operators discriminate against traffic by competing OTT services – and one in four internet users have experienced blocking or throttling of internet content.

This opposes the open internet ‘net neutrality’ principle, which asks operators to treat all data equally, and not intentionally slow down traffic that competes with their own services.

The EU does not yet recognise net neutrality as a regulatory concept, but competition authorities have scrutinised network operators’ attempts to restrict access to content. In 2013 the European Commission even raided major network operators’ offices over concerns these companies abused their dominant position to throttle data-heavy services such as YouTube and Skype. 

Net neutrality – safeguarding the streams?

Against this background, the commission is planning a section on net neutrality in its legislative package for a ‘connected continent’. The commission intends to support net neutrality as a legal concept, but also open up revenue opportunities for network operators. 

It would ban blocking and throttling practices, and make traffic management non-discriminatory and transparent. But it would let network operators and OTT providers agree on ‘specialised services’, to assure a quality of service, if it doesn’t affect the ‘normal’ internet service. 

But open internet advocates have criticised the proposal. They argue that the specialised services could create a ‘two-tier internet’ where only powerful companies could afford the ‘fast lane’, which would give them an unfair advantage over smaller companies. 

European Parliament adopts net neutrality law

To many people’s surprise, the European Parliament substantially amended the commission's proposal in April 2014. It clarified the net neutrality concept and limited network operators' options to offer preferential services to OTT providers. 

The European Council still needs to approve the parliament's proposal, but this new regulation will clearly influence network operators’ options to commercialise their infrastructure for OTT providers. 

What next for network operators?

OTT services will grow as we increase our networks and develop the ‘internet of things’. For network operators, this means more traffic on their networks and lower profits, unless they can effectively reposition themselves. 

Competition authorities will keep a close eye on network operators. To what extent network operators will be free to commercialise OTT providers' demands for fast and reliable data depends on these regulatory developments and how European regulators apply them in practice.