Speaking at the 2012 CommsDay Summit in Sydney, Optus’ director of digital media Austin Bryan has outlined the telco’s plans to increase their presence in digital services.

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Bryan cited, as a concern, the growing competition from OTT (Over The Top) services like Skype and Viber, which provide their own platform for launching services normally in the hands of telcos. With their focus on mobiles, the threat is in people demanding a pure 3G or 4G data connection on their phones, and then relying on these services to provide voice calls and messages, taking away key sources of revenue for monthly subscription service providers like Optus.

With this threat in mind, and with the growing expectation for free services in general (or “freemium”, where a basic service is free for most, with high margin charges for additional services), Optus will look to capitalize on its significant subscriber base in Asia (over 400 Million customers) and its early successes with digital services. Optus’ TV Now, a product that allows you to record free-to-air content and transmit them for later viewing on mobile devices, is an example of where Optus expects to grow new businesses as ubiquitous broadband, via the NBN approaches.

Further in the release, Bryan has highlighted some sobering figures – the Australian mobile market has “passed saturation point”, with 1.25 services per person. With so little room to grow, carriers like Optus will be hoping to deepen their relationships with customers, through the use of powerful social media tools and more digital services.

Moreso than social media is the ‘ecosystem’ that consumers will want to belong to. “Consumers no longer care about specific devices and services; they care about how those devices and services help them reach the wider ecosystems they find valuable”. Bryan then went on to point out the key drivers of Apple’s iTunes and App Store success, particularly in finding a way to incentivize content producers to ‘buy in’ to the ecosystem and make people’s lives easier. Bryan outlines Optus’ key innovations with this type of growth in mind:

-    TV Now  (enjoy TV wherever and whenever)
-    GoPlaces (reviews and special offers for local entertainment options)
-    SmartSafe (Secure cloud storage)
-    Optus MeTV (IPTV, allowing Pay TV options without long term commitments)

Bryan is confident that the traditional telecommunications industry can successfully compete in the digital services arena, thanks to 5 strong points

-    Strong, well established cash flows
-    Customers who trust us
-    Existing commercial relationships
-    Capacity to leverage networks
-    Local (retail) presence


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Bryan has done an admirable job of acknowledging where the mobile market is going- or rather, how it’s converging with the broadband internet market in general. What seems to be left unsaid is that Optus, and by extension the rest of the traditional telco industry, is afraid of a ‘Naked Pipe’ scenario. Right now, there is an economic model that allows telcos to effectively take 100 grams of sugar, and sell it off 5 grams at a time at wildly different prices. To unpack that metaphor, consider:

Mobile Data might be charged at $20 per Gigabyte (GB).

Phone calls are charged at 90c/minute.

One minute of phone calls consumes 1 Megabyte (MB) of data.

At that rate, phone calls are effectively being charged at $900 per GB.

In the past, this sort of differentiation has been justifiable, as switching a phone call requires agreements with different carriers and other switching that increases costs exponentially. But as more and more traffic is controlled by IP (internet protocol) and off proprietary networks, this differentiation will start to be untenable. Eventually, someone will come along and say “Pay us $40 a month. Make all the phone calls you want, anywhere in the world. Send as much text as you want. Browse the web and download anything you want”.

Amaysim have come close, offering almost all of that,except for international calls, and with only 4GB of data.  But the big telcos don’t want to jump from their profitable platform until they have something in place to replace it – ie. digital services.

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It’s definitely a good thing that Telstra, Optus and Vodafone want to offer customers an option to use home-baked apps. Ideally, it would mean that when I have a problem with a music download, I can call my provider. There’s just one problem. That’s not how these services operate.

Bryan gave himself away in the speech by referring to telecommunications as ‘our territory’. That’s presumptive. This is a market – the ‘territory’ belongs to innovators. If telcos want to provide digital services, they need to do what those companies do – come up with new ideas and hire the very best programmers and developers to deliver. And then they have to support the customer after the sale. Right now, they mostly buy a license for a product, re-badge it, and then refer to the parent company for support. BigPond did this with their $10 a month ‘BigPond Security', which was just MacAfee with some UI enhancements. When things went wrong, you could contact BP tech support – to get MacAfee’s number. Vodafone is doing a similar deal with MacAfee for Android OS protection.

Of the 5 points Bryan outlines as advantages held by traditional telcos, “Customers trust us” is the one that seems the most dangerously misguided. Customers don’t necessarily use telcos because they trust them- they use them because asking Pizza Hut to deliver a mobile service is not an option. If customers trusted their telcos, there would be no market for MVNOs; there would be no need for ACCAN, the TIO and other industry watchdogs; the concept of ‘bill shock’ would be nonsense, and there would be no comparison websites to help customers hunt for the best deals.

In fact, it could be argued that the consumers trust non-telcos far more than they do the telcos. If a company like Skype offers a poor service, or overcharges, or doesn’t offer support for their service, then you leave. Then they die. If Optus offers a digital service, and it fails to work, you leave – but you still pay Optus $60 a month to access the network. They still have you as a customer. There’s less incentive for them to offer a digital service that works well.

Telcos wants to have it both ways. They want to leverage their control of the actual infrastructure, but they also want customers to use their high-margin digital services. It’s essentially a form of vertical integration. That’s not always a bad thing, but it will take a huge amount of innovation, and the ability to let go of short-term profits to get into consumers’ heads, for it to work.