OTT: Friend or Foe?

Most broadband operators are on a collision course with OTT players.

Iain Morris, International Editor

September 16, 2014

4 Min Read
OTT: Friend or Foe?

Netflix. Amazon Prime. Blinkbox. Dirty words for telecoms operators trying to recoup hefty network investments through the sale of TV services? Or valuable content partners helping to drum up enthusiasm for broadband?

What's for sure is that the rise of the movie-streaming over-the-top (OTT) players has brought the long-running dispute about net neutrality to a head on both sides of the Atlantic, with European and US regulators now rushing to formulate rules they hope will be in the market's best interests. But is greater collaboration between operators and web companies still viable?

Certainly, that's what we are being told by the industry. Earlier this year, as it presented its full year 2013 results to investors Germany's Deutsche Telekom AG (NYSE: DT) updated its strategy to include a goal of being the "preferred telco" for OTT partners, promising to help Web services companies with security, technical integration and marketing. Netflix -- which has reportedly held partnership discussions with Deutsche Telekom -- has even been installing its servers in operators' data centers to improve the video experience. It all sounds perfectly harmonious.

In many cases, there is little reason to doubt that's the case. In a recent article in Wired magazine, Reed Hastings, the chief executive of Netflix Inc. (Nasdaq: NFLX), said he does not pay access fees to service providers in 99% of cases. But he does make payments to some of the biggest operators in the US market, including cable giant Comcast Corp. (Nasdaq: CMCSA, CMCSK) -- payments accompanied with a rather sour-faced expression, it would seem.

In the same Wired article, Hastings berates operators for charging "both the sender and receiver for the same content," despite having already installed fiber-optic lines with "limitless" capacity, and scolds the Federal Communications Commission for letting them get away with it. Netflix has been opposing Comcast's proposed takeover of Time Warner Cable Inc. (NYSE: TWC) out of concern the powerful, merged entity will be able to demand even higher fees in future.

In Germany, Deutsche Telekom last year took flak when it proposed to exempt its Entertain-branded TV service from usage caps that would affect best-efforts internet traffic. After legislators complained about aspects of those plans, the operator began weighing its options, but its mobile affiliates in Romania (Cosmote) and the US (T-Mobile US) already exempt the services of various Web partners from usage caps, angering net neutrality's most ardent supporters.

With Deutsche Telekom suddenly keen to reach out to OTT players, might it consider offering similar privileges to Netflix in a future arrangement?

Besides looking risky from a regulatory perspective, such deals have dubious attractions for operators. They could drive customers into Deutsche Telekom's embrace, and away from its cable rivals, but they could also convince those customers to forego Entertain. And while operators have largely given up trying to protect mobile voice and text-messaging revenues under an onslaught of OTT offerings, they are still counting on their own TV services to be an engine of growth. Last quarter, Deutsche Telekom flagged an 8.4% increase in revenues from Entertain (year on year) as most of its other ventures suffered a decline.

Partnerships with OTT players might, of course, persuade customers to spend more on broadband by upgrading to faster and costlier connections, but revenue growth seems increasingly unlikely with infrastructure-based competition forcing prices down. In the UK, rivalry between the former state-owned BT Group plc (NYSE: BT; London: BTA) and cable operator Virgin Media Inc. (Nasdaq: VMED) is already having that effect, while Deutsche Telekom is now coming under pressure from Vodafone-backed Kabel Deutschland GmbH . France also features several companies investing in superfast broadband technology. If the US still appears to be lagging, Google Fiber Inc. is beginning to stir things up. (See Google Takes Fiber Fight to AT&T.)

For Netflix, the best hope stateside may be that Google's plans lead to an improvement in broadband competition. That could be a long time coming, but greater rivalry would make it hard for Comcast to continue demanding access fees from Netflix. In Europe, meanwhile, a mixture of competition and regulation may ultimately deal flawed partnership models a fatal blow.

Assuming it ensures Netflix can provide unfettered services on any operator's network, this development is unlikely to worry Hastings, even if it does give him a bigger marketing challenge. But for operators plugging their own video content, it will only make conditions even tougher.

— Iain Morris, Site Editor, Ultra-Broadband

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About the Author(s)

Iain Morris

International Editor, Light Reading

Iain Morris joined Light Reading as News Editor at the start of 2015 -- and we mean, right at the start. His friends and family were still singing Auld Lang Syne as Iain started sourcing New Year's Eve UK mobile network congestion statistics. Prior to boosting Light Reading's UK-based editorial team numbers (he is based in London, south of the river), Iain was a successful freelance writer and editor who had been covering the telecoms sector for the past 15 years. His work has appeared in publications including The Economist (classy!) and The Observer, besides a variety of trade and business journals. He was previously the lead telecoms analyst for the Economist Intelligence Unit, and before that worked as a features editor at Telecommunications magazine. Iain started out in telecoms as an editor at consulting and market-research company Analysys (now Analysys Mason).

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