When news leaked in January that Facebook was allowing iPhone users in the U.S. and Canada to make free phone calls through its Messenger App the technorati speculated the service could become a Skype killer.
Skype may, in fact, wind up being the collateral damage. Facebook, which has a billion customers, could very well become the world’s largest phone operator. “There is no doubt that Facebook is now the biggest threat to mobile operators,” says veteran mobile industry analyst John Strand, founder of Copenhagen-based Strand Consult, which published a February report on Facebook’s role in the mobile ecosystem.
Facebook has more users than China Mobile, the world’s largest phone company; its customer base is double that of Vodafone, and bigger than India’s Airtel, America Movil and Telefonica combined.
The popular social networking site, which declined Informilo’s request for comment on its mobile strategy, has already cut deeply into operator revenues from services like SMS and MMS because users prefer to exchange messages and photos via Facebook for free. Now it could start putting a serious crimp in voice traffic.
“Its potential impact on the global telecoms industry is massive,” Emeka Obiodu, a principal analyst at researcher Ovum said in a recent research note. “A Facebook voice service has the potential to be the most disruptive communications solution in the smartphone era.”
He cites two main reasons in his research note: with over a billion users, the Facebook voice service will instantly be available to more customers than mobile operators or Skype can reach in both emerging and developed markets.
Secondly, Facebook customers will be able to use the communication solutions without much hassle. There will be no new ID to create, no new app to install, and no new user interface to get used to. In addition, as people on Facebook already have all their friends’ contact details, there will be no requirement to seek out friends and add them to a contact list.
As a result, Facebook “could quickly emerge as the largest voice communications platform and the largest originator of calls on a global scale, “says Obiodu.
For now, Facebook is offering a free voice service, via a feature added to its Messenger app, that is limited to letting its users in the U.S. and Canada call each other over WiFi or cellular data. You call someone by selecting that person’s name in Messenger, tap the “i” button, and then press “Make free call.” That person gets a push notification and you can then begin a free phone conversation. The VoIP service is just one more way of staying in contact with your network while staying within Facebook.
The service only works on the iPhone, between customers who have installed the Facebook Messenger app, and does not even have most of the features of a traditional telephone service. But given that Facebook has more than a billion users, Ovum predicts that over time the evolution and performance of its VoIP service will have a significant impact on how voice services are offered and priced globally.
Obiodu and Strand both believe the launch of the VoIP service is about testing the market to see how receptive it is to Facebook offering voice services.
The social network will extract itself from its deal with Skype for voice calls on its website and seek to roll out its own voice service across all of its platforms, predicts Ovum. That should set it up to enhance the service by including video and a service similar to Skype Out that enables calls to telephone numbers. Ovum also expects Facebook to open up the calling application programming interfaces to developers so that they can integrate the service into Facebook apps and maybe even leverage WebRTC technologies for it.
Ovum believes Facebook will not make much money from doing this, if it makes any at all. Instead, it predicts Facebook will use the VoIP service to enhance its platform to sell advertising. The collateral damage will then hit telcos in the form of lost revenues. In its report, “The Future of Voice,” Ovum predicts that VoIP services will cost telcos $479 billion by 2020. However, it believes the lost revenue will not be earned by VoIP providers. Instead, the telecoms industry will forfeit its share of the customer’s wallet to other industries within the economy.
Strand disagrees. Assuming such a Facebook Out service does at least as well as Skype Out, it could add $800 million to the social networking site’s revenues. And there is no reason for Facebook to stop there. It could opt to become a mobile operator, in the form of an MVNO, creating both problems and opportunities for mobile operators in local markets.
“Facebook is a listed company so needs to show growth in revenues and in profits,” says Strand. “So the question is where Facebook can get the most growth? Will it only come from advertising or in future will they try and make money on communications? If I were a shareholder of Facebook and the company chose not to go after communication revenues I would accuse them of mismanagement.”
The OTT Dilemma
While a move into voice is likely to make Facebook’s shareholders happy it is likely to, in turn, make the shareholders of some telcos miserable. Mature market telcos that have a sizeable postpaid customer base, charge mostly by volume, or offer unlimited call packages have less to worry about. For example, telcos in the U.S. that already offer unlimited voice bundles are unlikely to be concerned by Facebook’s initiative, says Ovum.
The same is not true for emerging market mobile operators, as most of their customers use prepaid services that charge per text. An offer that bypasses mobile networks to make calls to the same friends through Facebook for free is likely to lure lots of users, cutting into SMS charges, which today make up an average of around 20% of operators’ revenues, according to Strand Consult.
While mobile operators can price data tactically to try to recoup lost revenues, Facebook’s emergence as a voice service provider is yet another hint that telcos everywhere should prepare to move away from charging for voice, says Ovum. Charging for data can alleviate the concerns, but in the long term, Obidou says mobile operators may have to do what every other utility service does: impose a fixed/service charge or line rental.
The trouble is that Facebook is by no means the only over-the-top (OTT) player cutting into traditional mobile operators’ revenues. Ovum predicts losses from OTT players will grow to $54 billion by 2016.
Operators in developed markets may be better protected than their counterparts in the developing world but they are not immune. The U.S.’s FreedomPop, for example, has created a wireless data service that promises to save customers hundreds of dollars a year, at a time when growing data traffic is giving many customers bill shock. The service also incorporates a social element: users can “earn” extra free data by adding friends to FreedomPop’s internal social network.
In some cases, though, operators are finding it to their advantage to partner with OTT players. For example, Fon, the global Wifi sharing service, has inked deals with BT, Softbank, Belgacom, Zon, SFR, Netia, MTC, Oi, and KPN and says it expects to add more phone company partners by year’s end. Fon is one of a whole host of young venture-backed companies that are offering ways for operators to better cope with a huge surge in data traffic.
And, according to Coleman Parks, 70% of mobile operators now see OTT as an opportunity. One example: AT&T has spent millions of dollars to open three mobile developer centers to encourage developers to tailor their work to AT&T’s technical specs. 3 Group is integrating Skype into its user experience. And “carrier-managed” OTT services — where the carrier provides higher-quality access to video libraries or live TV — are starting to emerge.
Marco Veremis, CEO of Upstream Systems, a company specializing in mobile marketing, says he believes there is a lucrative opportunity for operators to offer OTT services in emerging markets. Since a tiny number of people own credit cards in these markets it is easier for consumers to buy apps via carrier billing, says Veremis. UpStream, an exhibitor at Mobile World Congress, works with developers to get their apps on its MINT platform, which reaches a total of around 500 million mobile operator customers in sub-Saharan Africa, the Middle East, Latin America and Southeast Asia. The app developers get a smaller percentage than the 70/30 split offered on the Apple app store but have the chance to potentially make more money by selling in volume.
For example, Star Arcade, a Finnish maker of games, is working with Upstream and the Saudi Telecom Company, to release its social gaming platform in Saudi Arabia. The platform contains games like Jelly Wars and Diamond Paradise and a tournament service that the operators can brand as their own. Players who opt to pay a small subscription fee of a dollar or two a month are offered a variety of benefits, including prizes. The upside for the developers is the access to the operators’ customer base and integrated billing. It gets a small percentage of the subscription rate. The plus for the operator is recurring additional revenues and potentially less churn, says Remco Smit, Starcade’s chief commercial officer.
Still, most consumers are likely to opt to go to outside app stores, such as Android’s, which has integrated carrier billing, rather than use apps that are selected and branded by carriers, argues Strand.
Integrated billing does give carriers some advantages but it doesn’t make up for all the revenues telcos are losing, says Strand. Operators need to have competitive pricing and plan packaging to address the Facebook threat, he says, as well as explore some Facebook integration.
There are a number of steps operators can take to prevent a future as dumb pipes. But they no longer have the dominant position they once had and are unlikely to ever regain their former glory. That is because operators haven’t just lost market share; they have lost mind share.
“Who do you think a customer will be more loyal to: Facebook or Vodafone?” asks Strand. It is an apt query. A January 21st online comment reacting to news of Facebook’s free voice service on Wired’s UK web site speaks volumes about how OTT players have turned the communications sector upside down: “The real question,” asked a commentator using only the first name Eric, “is do people want Microsoft (Skype) or Facebook as their primary voice carrier?”