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Summary

When the corporate strategy boss at a leading Chinese operator (which shall not be named) tells you that it is not having much success with its value-added services (VAS) strategy, you know much smaller digital service providers are in trouble. In China, where over-the-top (OTT) players are viral and pervasively used, it has been a challenge for DSPs to retaliate – even China Mobile. KDDI's "Life Design" strategy has worked – but not all operators will be able to emulate that.

The DSP road is rocky, but KDDI is the standout

The new buzzword is "digital transformation," and for me, as a global broadband strategy analyst, that means how operators are monetizing VAS as digital service providers. The short answer is DSPs are largely struggling to monetize VAS, including music and games. Strategies today include offering such content for free or bundling VAS for mobile subs on the most expensive plans, or charging a very low price for the VAS. But the industry has still to figure out the sweet spot for offering VAS.

In Japan, however, KDDI is offering a sophisticated Life Design strategy that is a standout for its successful take-up statistics and impact on value-added ARPA. The platform started years ago as a single offering – au Smart Pass – that offers paying customers 500 exclusive apps per month (usage is unlimited) for around $4. Security and cloud are also included as part of the offer, and au Smart Pass customers have surpassed 15 million. Next came more "Pass" services, including Video Pass. The platform now includes au Wallet with 20 million customers, and KDDI cross-sells to these customers everything from electricity services to life insurance and even home mortgages. M-commerce offerings (online shopping) are also part of the product suite. There are three key features to this platform's success: All services require an au ID (which intrinsically links the offer to the operator); au Wallet allows users to pay their credit card bills with their phone bills in a single monthly program; and rewards programs are interwoven throughout the various offerings. Tier-1 operators should emulate this model, even if only a large part of it.

In short, KDDI has been able to sell ancillary services to support digital services, which include unlimited access to OTT content, technical support, and security. In essence, we believe it has found the right role for the telco in this digital transformation. OTT players like WeChat have gone well beyond offering communications (voice and messaging) to offer VAS including music, games, and payments, which is why WeChat-heavy markets will find it harder to grow telco VAS unless they too find their niche.

Telco concedes that RCS is dead in the water

Meanwhile, investing in enriched messaging services (e.g., RCS) is not an option to add incremental revenues in some markets, including Taiwan. One Taiwanese operator recently told Ovum it had given up on pursuing RCS, likening its OTT cannibalization plight (in this case from WhatsApp and Line) to the Korean operators' battle. In Korea, two out of three operators have closed their Joyn-based RCS services – unable to compete on offerings against local OTT giant Kakao Talk. The issue for DSPs in markets where an OTT player is part of the fabric (such as China) is that they cannot charge for enriched messaging services, since those are offered by the OTT providers for free. Moreover, usage on their platforms is low and stagnant.

Appendix

Further reading

Enhanced Telco Communications Tracker: 4Q16, TE0003-000999 (February 2016)

Author

Nicole McCormick, Practice Leader, Broadband and Multiplay

nicole.mccormick@ovum.com

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