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June 2015

The Business Strategy of OTT VoIP Providers: Lessons from a Leading Softswitch Supplier

The Business Strategy of OTT VoIP Providers: Lessons from a Leading Softswitch Supplier

Telecom carriers are from Mars; OTT VoIP players are from Venus.  Though their business cultures are alien to each other, together these carriers and OTTs are the ones driving low cost, high-QoS communications across the globe.

“Coop-etition” is certainly the name of the game: carriers and OTTs both cooperate and compete with each other on a massive scale today.  And policing those places where their interests clash is where the regulators come in.

Now telecoms don’t really have to like the empire-building ways of leading OTTs, but they definitely need to know what the OTTs are about and where they are headed because that greatly affects carrier business strategy.

So it’s in this spirit of learning more about the business of OTTs that we invited Steve Petilli, President and CEO of softswitch supplier, SwitchRay, to explain how OTTs look at the comms world.

You’ll enjoy Steve’s fresh perspective.  He not only traces the evolution of OTT strategy and their tactics for growing market share, but also provides a rare look into the business of softswitch suppliers who will increasingly deliver value-added services to the OTTs in places like fraud management and billing.

Dan Baker: Steve, how would you characterize the perspective of traditional telecom carriers with the OTT VoIP providers?

Steve Petilli: Dan, the biggest problem for telecoms is that their networks are physically bounded.  And by that I mean that Verizon can only stretch its physical network so far before it must partner with an AT&T or an Orange in Europe to make the connection.

The IP world is not so constrained.  To the OTT guys, the market looks like a single global platform and they are not really concerned with how packets get from the US to Europe.  And, of course, this has been a long bone of contention between carriers and OTT players.  To the carriers who built out the necessary physical infrastructure, the OTT guys are stealing their voice revenues.

But we’re really beyond that stage right now because Skype is now the largest voice provider in the world in terms of minutes.  And VIBER is not too far behind.

If you read telecom magazines and blogs, you learn plenty about traditional carriers, but a lot less about the OTT players.

Well, I think you can trace the growth of the VoIP market in three evolutionary phases:

  1. The Early Years of Skype: Computer-to-Computer VoIP — Skype really got the VoIP ball rolling.  Skype’s early technology was developed purely around Internet protocols: it was a computer-to-computer service.  At the time, the concept of calling a standard PSTN phone or handset was considered irrelevant.  And with Skype you could use a user name or email address to identify you on the Skype network.
  2. The Commercial Roll-Out of VoIP as a National Service — In the US, it was Vonage who popularized the use of VoIP as a full replacement for fixed-line telephone service in the US market.  Vonage’s national advertising in the US went a long way to legitimizing VoIP as a service.  And soon thereafter, large cable companies like Comcast and Time Warner Cable launched VoIP service as the voice leg of their triple play strategies.  Today there are several dozens VoIP providers serving the US market, and many of them, like RingCentral and Ooma, are pursuing mostly the business/enterprise market.
  3. Global VoIP Apps — In recent years, the VoIP provider market has gone global in a big way.  Telegeography says that in 2013, 36% of all international calls were made using Skype.  And to challenge Skype, several other international VoIP providers like VIBER, LINE, and WeChat have emerged.  These VoIP apps have grown their user bases to hundreds of millions of people.
Steve, these Global VoIP app players are certainly the most interesting players to watch from a wholesaler’s perspective.  What’s their business model look like?

Well, just like the Facebooks of the world, these global OTT providers are trying to gather as many users on their platform as possible.  That’s what their valuations are based on, so they are constantly dreaming up ways to get people to spend another 10 seconds on their application.

So how do they do that?  Well, if you only make calls to someone else who has your VoIP app on their smartphone, that’s a relatively limited set of people.  But what if you can get people to call regular phones from their VoIP app?  Well, that opens the whole world of fixed and mobile phones to you.

And this is the key reason why some of these OTT players use a phone number as the user ID.  It establishes a commonality between your VoIP app calls and regular phones.  Now notice that Skype still relies on a Skype user name, not a phone number, although you can buy Skype minutes to call phone numbers from Skype.

Infrastructure-wise, there are two modes of voice calls — there’s the “IN” (In Network) app-to-app VoIP calls, and also the “OUT” (Out of Network) VoIP calls that use the public network.  And over time, the distinctions between IN network and OUT network calls will tend to blur.

So imagine when you first get your new phone, you get to decide whether you want your dialer to be the embedded mobile operator’s dialer or a third party VoIP app.  So this is ultimately where these OTT players want to go, though the carriers and regulators will have a lot to say about how fast and how far this evolution happens.

What’s the current relationship between the VoIP players and the wholesalers look like today?

A lot of relationship building is happening today between the VoIP and carrier communities.

Carriers are considering OTT offerings deployed through the app stores on the mobile phones they deploy.  For example, Bharti Airtel deployed its Airtel Talk app that is carrier branded but part of the Fring Alliance.

Any app that is in the Fring Alliance can call any other app for free using OTT connection (data charges apply).  The goal with this carrier service is to have subscribers stay connected to the carrier brand and allow the carrier to sell them other value-added services, including ring tones, stickers, etc.

Now for any VoIP call that terminates on the public phone network, the VoIP provider needs to deal with wholesalers who get the call to an actual PSTN phone number.  And here the VoIP app provider gets a portion of the termination fees just like a regular phone company.

The reverse is true as well.  There are carrier-OTT deals where the call originates on the PSTN and the carrier uses the OTT provider as the wholesale termination provider.  Hence, the call can originate on AT&T in the US and terminate on VIBER in Canada.  In this case, you don’t care which carrier the VIBER customer is using in Canada since the call is removed from the PSTN and put on the OTT VoIP network for the international transport and termination as an app data service.

But where the real money comes is when the VoIP provider grows the size of its base into tens and hundreds of millions of users.  That’s when they can demand excellent rates from wholesalers.

Other significant revenue streams for OTTs come from advertising plus partnering deals with other OTTs in the Web commerce food chain.

And going forward, it’s clear that VoIP voice and multimedia is where the action is.

Absolutely.  The OTT guys have far more advanced codecs than those in the PSTN.  And this is because the VoIP guys are really driving protocol development for high quality media.

A key reason OTTs can drive protocol improvements is their approval process is much faster and easier.  Think about it: you can probably name the top IP influencers around the world on the fingers of two hands.  Now contrast that to the number of people who would have to agree to a common interface in the PSTN world, well, that’s thousands of carriers.

This is why the PSTN tends to go with least common denominator technology.  Who wants to deal with a carrier in a foreign country who didn’t upgrade their codec, and now you can’t make a phone call to someone there?

So over the long term, the PSTN is destined to lose significant share in voice.  But today you can get HD quality over IP, not to mention playing music or high-bandwidth video, which you can’t get at all over the PSTN.

Steve, how does SwitchRay serve this dynamic VoIP marketplace?  How do you differentiate yourselves from big players like Oracle’s Acme Packet?

We have an extremely competitive solution.  A few years ago we acquired technology from the company that owned the MERA softswitch, and everybody in the softswitch business knows who they are, because it was the standard for a long time.

So the original team is still here and since the heritage of MERA is compatibility, we are carrying on that tradition.  Even our competitors still rely on MERA to provide the interoperability capability.

Now while we do not handle all the features a big service provider needs, we are a lot higher in the pecking order than the open source players at the bottom.

Our niche is the mid-tier market where the provider needs carrier-grade and standard interfaces that work well, and that are tested and proven.  We understand the nuances of implementation that go way beyond what’s written in the standards.

The softswitch market has evolved to the point where it’s very hard for new entrants to come in.  It’s who is executing the best that matters today — and who’s pushing into new areas.

So when you take a call off the OTT network and put it on the PSTN, you need the right converter.  You’re not going to take that high definition call and stick it on the PSTN as is.  So as a supplier, we are forced, to a certain extent, to support the latest protocol versions of those codecs.

And since we serve leading tier-1 OTT players, enabling these high-end VoIP protocols to support the lower end of the PSTN market falls into our lap.

I understand you recently launched an anti-fraud solution as part of your VoIP switch?

Yes, and frankly that decision aligns with my focus since I joined SwitchRay.  My mission is to drive the evolution into new capabilities such as fraud management and a lot of other things that live around the standard switch.  That’s where we win business.

Technology tends to get ahead of security and fraud protection.  For instance, you get all these cool mobile devices that you only later discover are not as secure and fraud-proof as you first thought.

In the early days, VoIP was panned as a toy for making phone calls over the Internet.  Then VoIP steadily started gaining structure to the point where it’s now carrier-grade and today about 20% to 30% of the entire voice market is IP — and on its way to 100%.

This is why SwitchRay is now addressing fraud and security.  Our solution maintains lists of suspicious numbers used in premium rate fraud and we match that with an analysis of calling plans across any number of PBXs and switches.

One of the nice aspects of our fraud management solution is that it can be bolted onto an existing VoIP switch.  This is a big advantage because it allows a VoIP provider to enhance its current infrastructure that’s already bedded down.

Billing is yet another place where we spend a lot of development time these days.  The calling plans of the OTT players are very advanced and it requires implementing things in our VoIP gateway.

For instance, in a pre-paid billing environment, when your last penny is finished, you can’t continue your call.  So as a provider you need to send the user a series of warnings.  That coordination doesn’t happen with the standard interfaces to these systems.  It requires us to work hand-in-hand with our customers to push the billing envelope with free points, free game-applied rewards, etc.  And as you earn credits, that leads to benefits such as more free calls.

So it’s our job to translate those billing ideas into something technically achievable.

Thank you for a very fine briefing, Steve.  You’ve got us up to speed on a critical piece of market knowledge that every carrier can benefit from.

Copyright 2015 Telexchange Journal

 

About the Expert

Steve Petilli

Steve Petilli

As CEO and Chairman of the Board, Steve Petilli leads the strategic vision and direction for SwitchRay.  He brings a strong history of product innovation, with a solid track record of building new businesses in the technology arena.  Most recently, he headed the Navigation and Telematics division of Telecommunication Systems.

Steve’s first major entrepreneurial success was in 2000 when he sold Pivotal Technologies to Broadcom for $240 million.  As one of the founders, Steve expanded the company through two financing rounds before the acquisition.  At Broadcom, he served as the Senior Engineering Director and headed up the high-speed video interface chipsets.

Steve began his career at IBM and later worked for the Communications Research section at NASA’s Jet Propulsion Lab (JPL) where he built complex systems for deep space communications.  He holds a BSEE degree from Rensselaer Polytechnic Institute and an MSEE degree from the University of Southern California.   Contact Steve via

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