Battle without retreat: From Over-the-Top to Under-the-Top disruption

Part 1: The challenge

Telcos have been facing disruption from Over-the-Top (OTT) players over the past decade as voice and messaging services migrate to the internet (cloud), ultimately resulting in the decline of telcos’ share of the markets and revenues. Despite some good fights, telcos as a whole have not been able to fully materialize the value from cloud services which has been championed by global, fast-moving internet companies.

From the telcos’ perspective, it has been comforting that their bread-and-butter business – (data) connectivity – has been nourished by the OTTs, allowing them to offset the lost voice and messaging revenues. Indeed, by owning spectrum, wires, sites, customers and deep pockets, telcos hold a very strong position in the connectivity business. However, connectivity itself is no longer a “walled garden”, but is gradually becoming a vibrant jungle. More and more signs are indicating that internet players and other innovative companies outside the traditional telco territory are challenging the way connectivity is produced and delivered through cutting edge technology, innovative business models, agile operation and global footprints.

In this round of the connectivity battle, is the telecom industry better prepared to respond to the disruptive threat which is not only taking a cut of the revenue pie but also chipping away at the foundations of the industry?

Through this article, we aim to introduce the concept of “Under-the-Top (UTT) disruption”, relevant initiatives and how they challenge telco’s business. Next article will further discuss why the internet players and others are entering the connectivity arena, the opportunity for telcos and how telcos can survive and thrive in the battle.

Under-the-Top disruption: what it is about

We use the term Under-the-Top for innovative technologies and initiatives hitting telcos’ core business – connectivity – through the whole connectivity value chain. Under-the-Top disruption takes the shape of:

  • Connectivity pipefication – initiatives that weaken or break the relationship between telcos and end users.
  • Connectivity replacement
    • Access connectivity – initiatives changing how businesses, consumers or things get connected.
    • Metro and backbone connectivity – initiatives impacting how and by whom metro and backbone networks are built and operated.
  • Connectivity democratization – initiatives that lower the industry barrier, enable new players to enter the connectivity business easier and intensify the competition.

Figure 1: Under-the-Top disruption across telecom value chain

Connectivity Pipefication

Connectivity pipefication refers to the emerging trend where actual connectivity providers are loosing access to and relationship with end users and left behind the scene. Examples of this include:

  • Google Project Fi: Google acts as an MVNO, and automatically connects consumers using Project Fi compatible phones to the best available network, either Wi-Fi or a partner MNO’s LTE network. The business model for this project becomes increasingly viable and scalable as Google expands its fiber backbone and its different access networks, and rolls out even more Wi-Fi hotspots.
  • Wi-Fi first MVNOs: Republic Wireless, Scratch, Freedom Pop, and more are MVNOs who default to Wi-Fi networks and only use mobile networks as a back up if Wi-Fi is unavailable. Wi-Fi first and regular MVNOs have been around for years, but they have not yet managed to disrupt the wireless market. Today, with a growing number of Wi-Fi hotspots and steadily improving technology they are starting to show promise, just like Google Fi.
  • Apple SIM: An emerging eSIM solutions, Apple SIM enables consumers to select their preferred service provider the first time a device is turned on or when entering a new country. This model allows users to compare prices and switch service providers instantly, which easily leads to accelerating price war and pipefication of telco service. eSIMs also gives more power to device manufacturers and ease the way for them to become MVNOs.
  • Embedded IoT connectivity: More and more IoT devices, such as connected cars and Amazon Kindle, are being sold with embedded connectivity as a free service. Telcos are naturally required in this model, but they are also losing their direct relationship with the customer and are gaining less revenue per connected element.

Connectivity replacement

Connectivity replacement initiatives from players outside the traditional telco territory are either competing with existing telco connectivity options, or filling in gaps in telcos’ current service models, eating the connectivity value pie in the process.

Access connectivity

Telcos are expanding their LTE networks to support faster mobile broadband, laying down fiber to sell high-speed fixed access, launching NB-IoT to better enable versatile IoT use cases and expediting the planning of 5G to take care of growing connectivity need. But in parallel, various evolutionary and revolutionary approaches are being taken by other players to cater to the same needs:

  • Traditional wireless/fixed access
    • Google Fiber & Webpass: Google Fiber aims to capture telcos’ broadband access business by providing ultra high-speed internet service. It has downscaled its initial fiber rollout plans due to the high costs ,and refocused its efforts towards other wireless and fixed-wireless technologies.
  • Non-terrestrial access
    • OneWeb plans to launch satellites in 2019 to provide coverage across the globe with speed of up to 1Gbps/user. User terminals will communicate with the satellites in the sky, and emit Wi-Fi, 3G and LTE signals to the surrounding area.
    • SpaceX, similarly to OneWeb, is planning to launch thousands of satellites into orbit to deliver high-speed internet. The first ones are expected to be ready by 2019, given the questions around spectrum, costs, etc. are solved.
    • Google Project Loon: Google is testing a network made up of balloons traveling on the edge of space to extend Internet coverage for people in rural and remote areas. The project has had encouraging progress and has been successfully tested in special circumstances, but it remains to be seen if this model can actually scale.
    • Facebook Aquila and Facebook Aquila initiative is currently testing solar-powered planes to deliver internet access to remote parts of the world. Aquila is part of Facebook’s initiative.
  • Wi-Fi access
    • New Wi-Fi providers and public Wi-Fi: Google’s RailTel partnership (part of Google Station) and Express Wi-Fi by Facebook are enabling internet access in the areas with lacking cellular connectivity. Also municipalities are pursuing smart city initiatives and deploying public Wi-Fi networks in EU, the US, Singapore and so on. Meanwhile Wi-Fi sharing communities such as Instabridge are emerging, making it easier to connect to any public Wi-Fi.
    • NextGen enterprise and consumer Wi-Fi: New entrants such as Cloud4Fi, Zenreach and Mist Systems are enabling new marketing, analytics etc. capabilities for companies of all kinds, and encouraging them to launch free hotspots. At home, plenty of more established (e.g. Netgear) and new entrants (Plume, Eero, F-Secure, etc.) are reinventing the Wi-Fi experience with easier mobile app-based network management, improved Wi-Fi experience, modern design, embedded security, and option for shared home-spots.
    • Wi-Fi overall impact: A whopping 63 percent of all traffic from mobile-connected devices is offloaded to a fixed network using Wi-Fi and femtocells, with growing number of available hotspots. Wi-Fi typically require telco-provided access connectivity, but the unfolding dilemma is: if there is reliable Wi-Fi connection at home, at the office and in public areas, the perceived value of your cellular connection will be under question.
  • IoT connectivity
    • Hierarchical, non-cellular networks: Different players (Sigfox, LoRa, etc.) are building Low Power Wide Area (LPWA) networks operating on unlicensed spectrum, and establishing related ecosystems. These technologies aim to fill the gap of current cellular technologies – catering to a variety of IoT use cases which require very little bandwidth and extreme power efficiency. IoT connectivity options and their suitability for different use cases are more widely covered in this Northstream white paper.
    • Non-hierarchical, mesh networks: With the latest technologies such as 802.15.4 family (Thread, Silver Spring, etc.) and the emergence of few new entrants such as Wirepas for smaller and also larger scale IoT networks, mesh networks are gaining new levels of attention.

Metro and backbone connectivity

Currently, tier 1 telcos build and operate backbone (tier 1) networks, but considering that two thirds of all traffic moving across the Atlantic is travelling on private networks operated by the internet giants, it is not so surprising that also they are entering this area. The same internet giants are also active on a more local scale, and are helping to spread metro – and eventually access – networks, especially in developing markets:

  • Google Project Link (now CSquared): Google is building metro fiber and Wi-Fi networks to help local ISPs and MNOs in Africa to connect more people to the Internet, while simultaneously collecting more and more building blocks to enter also the access connectivity business.
  • Facebook is also participating in the build-up of backbone networks in developing markets. The fiber building initiative in Uganda is part of Facebook’s strategy to improve connectivity everywhere and Facebook is planning to engage with other operators in additional countries to scale this model and accelerate the local internet coverage.
  • Backbone connectivity for cloud services: To deliver cloud services, Amazon, Google and Microsoft are making their data center grids denser, to improve performance and to meet data privacy/sovereignty regulation. They make themselves present in internet exchange points, inside telcos’ networks and even on the very edge of the network to get traffic faster to their own network. In order to connect these data centers, Google and Microsoft, for example, have built massive network connectivity which they are constantly expanding (e.g. Microsoft has increased its backbone capacity by 700% over last 3 years). They have also adopted the latest SDN, OpenFlow, etc. based network management technologies and DIY approach for designing and manufacturing networking equipment already several years ago. This is relevant for telcos because A) more and more traffic will move to these private networks, B) when enterprises move away from private data centers and infrastructure to public cloud provided by AWS and others, telcos’ role as a secure connector (or even colocation provider) of the private data centers and various enterprise sites diminishes. Network equipment vendors are also seeing their piece of the connectivity pie shrinking as Google, Facebook and their ilk build a progressively larger share of the infrastructure themselves.

Connectivity democratization

Connectivity democratization initiatives make it easier for new players to enter the connectivity and intensify the competition among incumbents. The focus of the list below is mainly on network infrastructure-related initiatives:

  • Access technologies
    • Unlicensed LTE and 5G: While LTE in unlicensed spectrum (LTE-U) has been driven by telcos and is currently being rolled out, it also enables Google and co. to consider launching LTE services. In a similar fashion, support for unlicensed spectrum is going to be included for 5G as well. While this will enable new deployment models for telcos, it will also bring about new possibilities for alternative players. Google, Facebook and Microsoft are showing their interest in spectrum also through their membership in Dynamic Spectrum Alliance which is advocating for laws and regulations aiming to increase dynamic access to unused radio frequencies.
    • Facebook’s OpenCellular initiative: Facebook’s open source wireless access platform is a good example of the online world’s open source culture. In addition to possibly shaking up the telco business for both the better (making equipment cheaper and easing coverage expansion) and for the worse (barriers to entry will decrease), network equipment vendors and the $350 billion telecommunications market are also to be reshaped.
    • Facebook Telecom Infra Project: Facebook is running several access-related Telecom Infra Projects as well. Facebook Terragraph is a multi-node wireless system utilizing unlicensed 60 GHz spectrum, focused on bringing high-speed internet connectivity to dense urban areas. Project Aries’s goal is to build a test platform for extremely efficient usage of spectrum and energy. As it views connectivity as one of three corner stone technologies in 10 years, Facebook is likely to intensify its effort in this area.
  • Metro and backbone technologies
    • Facebook Voyager: Facebook has built a “white box” transponder and routing technology for metro and long-haul fiber optic transport network, aiming to enable more scalable and cost-effective backhaul infrastructure. It leverages the data center technologies Facebook has developed for its top-of-rack switches.
    • NFV/SDN open (source) initiatives: Numerous and partially complementary/overlapping open (source) initiatives and communities are taking the role traditionally held by telecom standardization bodies. They are re-designing how network services are deployed and operated, applying the lessons learned from data center virtualization. Bodies such as ONAP, OPNFV, OSM, ONOS, CORD, OpenDaylight, OCP and Cloudify, among some smaller-scale partnerships, are reimagining everything from the telco hardware to how networks and services are orchestrated. While there’s a sense of co-operation between telcos, vendors and new players, there’s also the concern of competition.


The figure below loosely maps major UTT initiatives based on their potential disruptiveness to telcos’ existing business models and technologies, and whether they provide an opportunity, a risk or something in between for traditional telcos.

Note1: The graph contains forecasting – e.g., the disruptiveness of SpaceX’s business model is hard to estimate as it’s in the sketching board.

Note2: Telcos themselves are participating or investing in many of the initiatives, which will be further discussed in the next article.

 Figure 2: Under-the-Top disruption initiative mapping

The following conclusion can be made based on the initiatives discussed:

  • Connectivity pipefication is happening. Connectivity seller vs. provider relationships are more and more decoupled. Connectivity is gradually becoming an inherent part of the product provided as a service, and users are expecting connectivity to “just work” at a reasonable price, regardless of the access technology or provider.
  • Telcos’ heavy investments in access infrastructure give them a head start against new players – you cannot turn radio towers into software – but competition for delivering internet access is stiffening. Wi-Fi networks will likely continue to grow and erode cellular value, whereas the advancement of satellite technologies is less clear but their impact could be profound. Furthermore, pre-5G cellular technologies are not a “one-size-fits-all solution” for IoT connectivity.
  • Open source-based networking technologies have gained significant publicity and attraction, and their actual business impact is starting to emerge. This movement lowers the barriers of entry for new players and intensifies the competition among incumbents.
  • Internet giants continue to expand their backbone connectivity, and are getting closer and closer to the last mile. All the cards have not been played yet; on the technology side, but especially business side – if the tech giants wish, they have the scale, cash and user base to test quite disruptive business models.

Overall, telcos are being challenged from multiple fronts, pushing them to not just look left and right but also up and down. Bold UTT players are joining the connectivity battle with innovative technologies and business models, reshaping the value chains and redefining the industry logic. However, it is worth noting that while the spread of OTT applications was rapid, in the case of connectivity the cycle of change is slower and more incremental, and so far the scale of most aforementioned UTT initiatives has been limited. There may be more time for telcos to react, and that is what telcos must do – the consequences are more profound for telcos’ business this time. If the connectivity ground is lost, there is nothing to offset the revenue loss. It is a battle without retreat.

In the next article we will elaborate on why the internet players and others are entering the connectivity arena and more importantly: how telcos can survive and thrive in the battle.

/Joonas and Wei

Joonas is a Manager and Wei is a Senior Consultant at Northstream

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