While doing my weekly shopping, a task I rarely enjoy, I started looking at the endless rows of products, their brightly coloured images, fancy fonts, different sized and shaped packages, all jostling for my attention and, ultimately, my wallet. As food shopping is one of my least favourite activities, I decided to occupy my mind and stop it from going into “screen saver” mode by looking closely at the symbiotic relationship that underpins this ecosystem.
Like all successful symbiotic relationships, each party does something that benefits the other party: supermarkets provide the outlet display, sell the goods and collect the payments, while food manufacturers provide the goods that supermarkets need to attract customers and get them to spend cash. After all, it’s pointless to be a manufacturer if you cannot sell your products, and it’s equally pointless to be a retailer if you have no goods to sell or customers to sell them to.
One could argue that food manufacturers could make a larger profit by selling their products directly to the end users. However, to do that, they would have to buy a fleet of lorries, build warehouses and distribution centres in every town, open shops on every street, fill them with shelves and lights, staff them, advertise them, and keep them both heated in the winter and air conditioned in the summer. All to convince customers to come to their shop to buy just one or two specific items. Food manufacturers are good at making food, packaging and marketing, and the logistics that go with these activities, but the logistics of running shops and supply lines are totally out of their area of expertise. And this is why manufacturers focus on manufacturing and leave the rest to supermarkets. Sharing tasks and revenues makes obvious economic sense.
Looking at our industry, the similarities are striking. OTT providers are like food manufacturers: they make content that they need to sell, and like food manufacturers who sell their products through supermarkets, OTT providers sell their products through telco networks. Yet herein lies a subtle but significant difference, because when food manufacturers deliver the goods to the supermarkets to put them on shelves and sell them, the money goes straight from the customer’s pocket to the supermarket’s bank account, and the supermarket keeps a chunk of that money to pay for their service. On the other hand, OTT providers sell directly to the end customers, and use the telco’s network to deliver the content practically for free. It’s like OTT providers are literally walking into the telco’s “supermarket”, filling any shelf they like with their own products, and then setting up their own tills to collect the cash directly from the customer. Telcos who pay to run and maintain the entire infrastructure don’t see a single penny, from a single transaction.
So, are telcos the only losers here? Surprisingly, the answer is no, because ultimately consumers and OTT providers are also losers. How? Start with the end user. As a frequent traveller who spends endless hours in airport lounges and on long-haul flights, I always have content stocked on my smartphone and tablet to while away the endless hours. I have subscriptions to Sky Go, Amazon Prime, Netflix, BT Sports, Spotify and Apple Music. I use a direct debit from my bank account to pay for my mobile service, and the rest are spread over four credit cards simply because I do not trust them enough to give them my bank details. Now imagine the hassle I have to go through every time a credit card expires or is lost – I need to wait for the replacement card, remember which service is paid on which card, remember my login details for that service, enter the credit card details, set up a new payment agreement and pray that it works. Imagine how easy my life would be if I just bought all of these services through a single provider, using a single monthly debit and a single interface to manage all of the accounts! This is not a new concept, it’s what I do every time I shop in a supermarket: I use a single shopping trolley, I fill it with multiple products from multiple manufacturers, and I pay for the lot at one till in a single transaction. I only need to use one payment card, enter my PIN once, and go home in time to get on with my life while the supermarket sorts out how much money each food manufacturer should receive.
What about the OTT content provider, how would they benefit from using the telcos as distribution channels? First and foremost, the OTT providers need to find customers, and once these customers are signed up the OTT provider will then need to store their contact and payment details, collect the payments, make sure to pay the credit card companies their handling fees, perform revenue assurance and fraud detection to secure their revenues, keep the customers engaged, run customer support call centres, log trouble tickets, troubleshoot the problems, run analytical reports, make sure that the content is being delivered as it should be by the network… in other words, replicate what a telco already does for the very same customers. Wouldn’t it make more sense for the OTT providers to focus on making the content, and let the telcos do everything else, a bit like food manufacturers and supermarkets?
But how can profits be created from thin air? Let’s look at a simplistic breakdown of the components that make up the retail price, i.e. the price that the end customer pays:
Retail Price = Production Cost + Mark Up + Cost of Sale
The OTT provider will always bear the Production Cost, and would like to keep as much of the Mark Up as they can – they are more than happy to let someone else shoulder the Cost of Sales. Now the important thing to remember is that Retail Price is fixed, so a decent profit can be made by reducing the Cost of Sales and pocketing the difference, something telcos are well placed to do.
So how can telcos reduce the Cost of Sales? Simply put, the Cost of Sales includes everything from the cost of acquiring the customer to the cost of servicing that customer. Telcos can acquire new customers at a lower cost since they have direct access to a huge captive audience, i.e. their own subscribers. They know who those subscribers are, what they do, what they like, and how they behave. Therefore telcos can easily segment their customer base, and target each individual subscriber with specific marketing campaigns. Once converted, telcos can service these customers at a lower cost because these customers are already configured on the CRM, billing systems etc., and telcos have a dedicated customer care and customer management infrastructure. Is it worth the telco’s time and effort? Well, I calculated that what I pay the OTT providers is 5 times what I pay my mobile provider, so I am sure my provider would be more than happy to channel all that money through their accounts in exchange for a small fee!
As the old saying goes, if you can’t beat them, then join them.