This article was featured in the May 2016 edition of Latin America Telecom, a monthly newsletter covering communications development in Latin America.
The Latin American market is large, complex and full of contrasts. Latin America cannot be seen as one single region while defining a market strategy; rather it is characterized by a set of countries with major differences in specific political, economic and social aspects, each with their own customs and habits. When it comes to a revolutionary transformation process such as the digital era, these differences also need to be taken into account. The technological evolution happening right now is global, but local context is equally important.
Over-the-Top (OTT) services are a key part of the digital ecosystem value chain. Their level of successful penetration and ability to put pressure on other industry players depends intimately on their ability to serve the needs of these different markets with adequate, easy- to-use local services and content. This itself depends directly on the existence and quality of local telecommunications infrastructures, on the improvement of broadband speed, massive smart device adoption and affordable (even perhaps free) access to high-speed internet connectivity.
OTT is defined as a value-added service or any application or service that runs over an operator's generic data network. The main OTT services can be grouped into four categories:
Despite the fact that its development is still early compared to other regions, OTT services in Latin America have skyrocketed, putting accelerated pressure on traditional communication services. The OTT market in Latin America is expected to grow drastically, generating around US $1.84 billion in revenue by 2018, compared to US $510 million in 2014. This is more than a 262 percent increase within four years (Source: www.ooyala.com). Mexico, Brazil and Colombia are leading the market in terms of revenues and platforms.
Instant messaging applications such as Whatsapp have seen significant adoption, as have social network platforms such as Facebook. The usage of social messaging services is high in the region, likely because they do not require a high level of bandwidth compared to video calls or streaming video.
Despite the clear dominance of Netflix, video streaming also relies on the initiatives of local communication operators (such as Telefonica, America Movil, Cablevision and more) to develop local OTT platforms such as Claro Video, which is able to promote local content, generating local and parallel added value. In this case, access to high-speed broadband services is a key success factor for OTT services to develop quickly.
Most recently, the Mexican giant, Televisa, launched its OTT platform, Blim, for streaming video-on-demand (SVOD) services available across Mexico and Latin America, with the exception of Portuguese-speaking Brazil. Blim is another great example of the growth opportunities in this area.
In order to explain the growth potential of the OTT services in the region, it's good to take a look at the overall market situation in Latin America. The population, including the Caribbean, totals 634 million people, with approximately 750 million mobile connections. The region—with an average penetration rate of 122 percent—is one of the world's largest mobile markets by volume. However, the key success for growth remains in the mobile broadband penetration to allow primary access to the internet, which occurs mainly through mobile. In this respect, only 10 percent of the population has a broadband subscription, although this rate is growing continuously. According to the GSMA, 57 percent of the population has access to mobile broadband coverage, but do not subscribe to it.
On the other hand, the region has been experiencing a huge income inequality. The cost of telephony ownership is an average of 17 percent of income for the bottom 40 percent of the population, according to the GSMA. However, every citizen wants to be connected, and connectivity has become a basic need.
Traditionally, network operators gained 100 percent of their revenue from the communications services they offered. Latin America's operators map was defined as monopolistic. What recent years have shown is that no dominant position is permanent; everyone needs to adapt quickly to the penetration of new platforms such as OTT. OTT is causing operators to face significant challenges when dealing with impacts on their network capacity, their services, their business models and traditional revenue sources.
In the past few years, we have witnessed various Latin American operators reporting revenue growth decrease or net profit shrinkage. However, it does not seem to worry cable and satellite operators, since the forecast predicts that by 2018, almost 95 percent of pay-TV income will still be generated by traditional platforms, according to Dataxis.
Operators understand that they need to develop new strategies and different business models to not be excluded from the increasing revenue potential coming from these OTT services. They recognize they cannot stop the OTT wave and should see it as an opportunity to increase their data services offerings, as data traffic per minute is increasing rapidly through the use of file sharing, video, audio and social networking.
Recognizing this rapid growth in data usage, many operators have created unprecedented initiatives, offering new bundled services or even developing their own OTT. For example, a bundled service may include (across country or across a given regional area, such as Mexico, United States and Canada) packages of unlimited minutes, SMS and unlimited access to messaging (Whatsapp) or social networks (Facebook), in addition to other various options in data services and subscriptions. For video streaming services, a number of local initiatives come from the operators developing their own OTT services.
As mentioned above, traditional services, especially postpaid services, including data subscription, are still unaffordable to a large majority of the population in Latin America and this has spurred the predominance of prepaid programs. The rise of OTT players and services has created unprecedented competition, however, thus more choices for local consumers, enabling them to be connected no matter their economic situation.
Through increased pressure of OTT services and the overall penetration of competition, customers have become more sensitive to the level of service that they receive and have become more demanding to the point where they will and do change providers if they do not receive the quality and offering they need. As a result, operators are increasingly concerned about customer experience. Therefore, OTT pressure is pushing operators to improve the quality of their customer experience through new capabilities such advanced analytics to design targeted strategies.
A final important aspect of the transformation process lies in the regulation challenges. Does the convergence of services offered by OTT require regulatory changes? This is a common underlying problem across the world that needs to be addressed.
OTT in Latin America is still in the early stages, but OTT platforms, especially video-on- demand (VOD) services are ready to explode and new players are definitely changing the rules and shaking up existing business models. The proliferation of new services is gradually pushing consumers to be more demanding, which will help close the connectivity gap. Operators will have to face the new wave of challenges with creativity and flexibility and adapt to the conditions of the evolving market ecosystem with innovative new services.