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Clash between telecoms and free mobile apps unavoidable

Around a year ago, the Africa Research Institute (ARI), a UK based not-for profit think tank that exclusively focuses on Sub-Saharan-Africa, released a report postulating that within two years of releasing the report, smartphones with the capabilities of top-of-the range models at the time would be available in Africa for about $30. It is barely two years since ARI released its report but smartphones with entry level features are currently available in electronic stores around Nairobi and other major African cities for as low as $25. It is no surprise, then, that PwC actually sees the number of smartphones in Kenya relative to basic feature phones leveling off by 2017. Smartphone subscriptions in Kenya will grow to just over 20 million (in a country of around 42 million) in 2017, from around 6 to 7 million in 2013, the consultancy says in a report on the media industry in Kenya.
The increased penetration of smartphones in Kenya means that mobile apps such as WhatsApp, Facebook, Viber, Snapchat and the rest have also become more widely available to the masses. The reason for these apps’ popularity is a no-brainer. They are free and the only charges that users encounter are the data charges from the Telco. This means that on a data bundle worth, say sh20, a user can send videos, make calls, and send pictures and audio on platforms such as WhatsApp. The same would have cost—without fear of exaggeration—even fifty times more on the regular network.
WhatsApp, along with a wide range of other apps such as Skype and Google Hangout, are called over-the-top (OTTs) apps. This is because they basically provide users the option to text, make calls or video conference for free over a data connection.
Point of friction
This “free” component of WhatsApp, though the foremost selling point for millions of its users, is also a key point of friction for network carriers, Safaricom and Airtel. The general feeling is that WhatsApp and other over-the-top apps, but mostly WhatsApp, is freeloading WhatsApp and other OTTs make huge amounts of revenue on top of infrastructure that they not only do not own, but do not pay a cent for.
Moreover, users are no longer sending SMSs or making calls directly over their phone networks but using WhatsApp, which as earlier mentioned is significantly cheaper.
Understandably, network operators are not happy about any of this. They feel that it is not fair that while they pay for infrastructure, apps such as WhatsApp are not only reaping the most revenue out of this infrastructure, but also gnawing into their voice and SMS market share. They are concerned that these OTT apps will do to mobile phone carriers what the internet did to postal mail—induce a slow but sure death.
Airtel Africa’s chief executive, Christian de Faria, admitted in June 2015 that free calls and messages on messaging platforms such as WhatsApp posed a significant threat to network carriers. Safaricom also presented reservations about OTTs. The key concern, of course, is that people are texting and calling less over networks and instead doing so over WhatsApp, Viber and other OTTs which don’t pay for the infrastructure they use. Operators are therefore meeting the costs of setting up infrastructure—including paying licensing fees—while OTTs, increasingly, take a greater share of the revenue generated from use of this infrastructure.
It is conceivable that network carriers want OTTs to pay for use of infrastructure, or at the very least, pay licensing fees. In fact, Safaricom’s Director of Corporate Affairs Michael Chege has previously commented on this, saying that OTT players avoid high licence fees paid locally, giving them unfair advantage. Airtel has also commented on the matter along the same lines. Regulators should consider regulations for OTT players that cover licensing, spectrum, security and revenues, said Airtel through Dick Omondi, its Director of Corporate Affairs.
Network carriers have also presented a much broader set of concerns about OTTs, presumably to bolster their case. Safaricom, for instance, said the apps cause security concerns as calls are encrypted and no records can be produced of such communications should they be required by investigating bodies. This is a very strong argument that could gain a lot of political currency in light of the ever growing need for stronger surveillance to combat terrorism.
Expectedly, it is not only carriers in Kenya who are concerned about the rising popularity of OTTs. Across the rest of Africa and indeed throughout the world, there are similar concerns. South Africa, as an example, is now at advanced stages (as at January 26, 2016) of discussing a bill in parliament to introduce “necessary policy interventions on how to govern OTTs, regulatory interventions on the guidelines to regulate OTTs,” including “legal intercept and emergency call access” and the “impact of OTTs on competition,” according to reports by South African media houses.
In the U.S. and U.K., carriers have also expressed concern. The Telegraph reported in March 2015 that UK mobile operators had said they face unfair competition from Internet-based communications services that rely on their network infrastructure to run. The debate has also been hot in India, including culminating into a Twitter exchange between Bharti Airtel and Facebook founder Mark Zuckerberg in April of 2015, according to a report by Indian Express.
The approach has been notably different in France, where it appears carriers have more sway with regulators. France has now demanded that Skype register as a telecom operator in the country so that it can be subject to its telecommunications legislation and meet certain obligations. It is expected that similar regulations will be applied on other OTTs, mostly WhatsApp.
Other places where regulators have been sympathetic to network carriers’ concerns are South Korea and Taiwan. South Korea Communications Commission has reportedly made it legal for telecom operators to charge their customers extra fees to use the voice applications or block their use entirely. The National Communication Commission of Taiwan is also planning to regulate mobile apps. This will force certain mobile app developers to obtain an operating licence from the regulators.
In China, the issue is expectedly of no huge concern considering the government maintains a very tight control over the internet and how Chinese interact with the internet. There have been very many documented run-ins between the Chinese and Google and American internet streaming giant Netflix bypassed China in its global expansion due to the “Chinese government’s policy.”
Sense of irony
Much as there is validity to the claims that network operators make about OTTs—they are making money off infrastructure that they don’t pay for—there is also an overwhelming sense of irony. Part of what attracts users to network operator’s data services are the same OTT apps they are now vilifying.
Safaricom, for instance, has witnessed consistent growth in data revenue. In its half year financial results posted in November 2015, revenue from mobile data increased by more than half to settle at Sh9.2 billion. It is expected that growth of mobile data revenue will adhere to this trajectory in the mid-term on the back of increased popularity of OTT apps such as WhatsApp, Facebook, Google and the rest.
OTTs are therefore driving growth for use of data services. This is generously contributing to the top line of network carriers and helping them expand their reach. Why then are network carriers so keen on pushing for the regulation of OTTs?
When the whole issue of over-the-top apps is viewed from a much broader perspective, the source of contention becomes clear. The problem isn’t really OTTs per se. As shown clearly, OTTs are good for network carriers’ business as they drive subscription to data services. The real problem is WhatsApp.
WhatsApp has achieved the kind of success that should get any well-thinking network carrier worried. Bought by the social media giant Facebook in 2014 for a princely sum of $19 billion, WhatsApp now boasts of over 900 million users worldwide. This means that there are now 900 million people all around the world (a growing proportion from Africa) who can call, text, send pictures, videos and audio messages—virtually the entire service package of network carriers—for next to nothing. WhatsApp is cannibalizing network carriers. This is certainly justifiable reason to worry.
Though the threat posed by WhatsApp to network carriers is real, the push to regulate them still smacks of some irony. This is because it is in the very nature of business to face threats that compel them to evolve or fade into obscurity. Businesses are subject to the theory of natural selection—this is risk management 101.
When telecoms, for instance, came into the fore in the 80s and 90s, they sent post offices, fixed line telephone and fax companies out of business. Moreover, they rationalized their market disruption and christened the action as “innovation”. Now that its telecoms turn on the chopping block—OTTs, of course, holding the knife—they want to call it “unfair competition.” It is not difficult to see the irony in this and why telecoms may just need to battle it out without the inordinate involvement of regulators.
This notwithstanding, telecoms are acting within their right. Businesses have the right, to the extent that the law allows, influencing regulators and other key players for favorable business environment. In fact, the global reaction to OTTs by network carriers has brought to light some more pertinent issues.
Pertinent issues
The concern over OTTs and how they can coexist side by side with telecoms brings to light the issue of convergence. Technology and convergence are moving extremely fast; too fast in fact. The current regulations on broadcast and internet are becoming outdated. At the time of writing, the ICT Cabinet Secretary, Joe Mucheru, said his ministry was working on a policy paper on how to regulate OTTs at this time of rapid change.
Regulating the internet has never been easy; whether it is done with a view of leveling the playing field for telecom companies or protecting certain national values. India, for instance, under the current regime of Narendra Modi, has tried some form of moral policing over the internet. This has unsurprisingly been largely unsuccessful, with detractors even labeling it a “waste of resources.” It therefore comes as no surprise that the Kenya Film Classification Board’s attempt to regulate internet streaming giant Netflix, which recently launched in Kenya, has also been unsuccessful.
The regulation of OTTs, which are licensed and domiciled thousands of miles away, is a legal nightmare. It requires a lot of expertise in international business law, not to mention preexisting levels of cooperation between respective countries that may occasionally lack.
OTTs such as WhatsApp and Facebook are changing the game not just for telecoms, but for other players in the broader ICT sector such as broadcasters. More advertising dollars, for instance, are going to social media, reducing revenue for broadcasters. Just three years ago social media used to be called unpaid media. Those days are over. Marketing on social networks today requires a shift in mindset—one that considers social networks, like Facebook and Twitter, as any other ad-supported media properties. They have targetable mass audiences that you can reach if you’re willing to allocate a chunk of your media budget. This, of course, means that traditional media players such as broadcasters are facing considerable risks of reduced ad revenue from brands.
In concluding, the convergence of broadcasters, apps, telecoms and other players through the internet is producing a lot of opportunities, including economic ones. World Bank studies indicate that a 10 percent increase in internet penetration leads to at least 1.3 percent growth in GDP. Convergence is also coming with a lot of headaches, not least of which is how apps such as WhatsApp—which are cannibalizing Telco’s traditional revenue bases—can exist side by side with these same telecoms. This will certainly be an interesting area to watch over the next years.