2.2 The Second Dilemma: Disruptive Competition from OTT Services
2.2.1 The Rise of OTT Wave
While telecom operators are struggling with cost issues, a disruptive force from the internet is rapidly eroding the market share of traditional telecom businesses. This is the OTT (Over-The-Top) services— they provide content and services directly to users via the public internet, completely bypassing the control of traditional telecom networks.
The competition brought by agile organizations operating on the public internet (such as Google Talk, Skype, and Netflix) is intensifying, prompting service providers to seek innovative ways to break the status quo and increase revenue streams. This statement captures the essence of the problem:OTT service providers do not need to build their own network infrastructure but can utilize the networks built by operators to offer competing services to users.
Skype fired the first shot. Skype was the first service to replace traditional telephone communication. Founded in 2003, Skype allows users to make free or low-cost voice and video calls over the internet using VoIP technology. By 2010, Skype had reached hundreds of millions of users, a significant portion of whom used it to replace traditional international long-distance calls.
How significant is the impact? The numbers speak for themselves. According to a forecast by London-based research firm Ovum, the telecom industry is expected to lose a total of $386 billion in revenue from 2012 to 2018 due to customers using OTT voice applications like Skype and Lync. $386 billion—this astronomical figure is enough to keep any telecom executive awake at night. The revenue decline primarily comes from losses in international calling and roaming fees, which are precisely the areas where operators have the highest profit margins and reliance.
Instant messaging applications have triggered a second wave of impact. If Skype’s influence was mainly concentrated on long-distance and international business, the rise of instant messaging applications like WhatsApp, Facebook Messenger, and WeChat poses a direct threat to the operators’ basic SMS business.
The timing is crucial. The global smartphone shipment volume nearly doubled year-on-year in 2010, which was also the year when major OTT services like WhatsApp and WeChat began to gain popularity. The proliferation of smartphones provided the perfect soil for OTT services. These applications offer not only text messaging but also images, videos, voice messages, file transfers, group chats, and voice calls, far exceeding the capabilities of traditional SMS and MMS, while the cost is either free or very low.
The adoption speed of OTT messaging services is so rapid and widespread that it has become mainstream for various practical purposes, rather than merely a product of mobile data and smartphone penetration. This “viral” spread rate is something traditional operators have never witnessed.
Even industry giants are not immune. Several Asian telecom companies, including China Mobile, the world’s largest mobile operator with over 760 million users, have attributed disappointing financial performance to OTT chat applications. For giants like China Mobile, SMS business was once a significant source of revenue, but with the popularity of applications like WeChat, SMS volume has plummeted dramatically. From billions of messages per day to halving and halving again, this once “cash cow” business is rapidly drying up.
Video streaming has triggered a third wave. In the content domain, the rise of streaming platforms like Netflix and YouTube poses challenges to operators’ traditional IPTV businesses. The digital comparison is striking: Netflix had 36.3 million users in the third quarter of 2014, while AT&T’s U-Verse and Verizon’s FiOS video users totaled only 11.6 million. The three-to-one user gap clearly shows the shift in market dynamics.
Although OTT video does not directly compete with operators’ voice and SMS businesses, it diverts users’ attention and willingness to pay, and places extremely high demands on network bandwidth.Ironically, operators have to continuously invest in expanding their networks to support this traffic, yet they cannot share in the content revenue.
2.2.2 Core Advantages of the OTT Model
Why have OTT service providers been able to rise rapidly and gain an advantage in competition with traditional operators? The answer lies in the fundamental differences in business models.
Price advantage is the most intuitive. The high-quality services provided by OTT service providers include zero advertising, real-time chat customer support, group screen sharing, and group video chatting (PDF), yet they adopt a freemium model: basic features are free, while advanced features are charged. In contrast, operators charge by the minute for voice services, by the number of messages for SMS, and international roaming fees are exorbitantly high. Users vote with their feet, and the choice is obvious.
Iteration speed is an invisible advantage. OTT service providers are pure software companies without hardware burdens, allowing them to update applications weekly or even daily, quickly responding to user needs and market changes. WeChat’s evolution from instant messaging to payment, mini-programs, and video accounts is dazzling. In contrast, operators are constrained by the upgrade cycles of network equipment, and it often takes months or even years to plan and deploy a new feature. By the time operators launch a new service, the market may have already changed dramatically.
Global consistent experience is a strategic advantage. Users sending messages via WhatsApp in New York and Tokyo have a completely consistent experience, with seamless switching. In contrast, operators’ services are often regionally restricted, and cross-border roaming not only has a poor experience but also incurs frightening costs. For increasingly international users, this difference is fatal.
Ecological construction is a long-term advantage. OTT services are based on internet protocols, allowing for easy integration of various third-party services and APIs, quickly building ecosystems. WeChat integrates payment, shopping, travel, social, and content, becoming a super application. In contrast, operators’ networks are closed gardens with low openness, making it difficult to attract third-party developers.
2.2.3 The Embarrassing Situation of Telecom Operators
What frustrates operators the most is a deeply ironic reality. OTT services (such as Skype, WhatsApp, IMO, and Facebook) directly use the infrastructure built by telecom companies to reach customers without paying any regulatory or platform fees.
This is akin to building a highway and watching others drive on it to make money while you can only collect tolls. Operators invest hundreds of billions in building and maintaining networks, bearing all regulatory responsibilities and service quality obligations, while OTT service providers can “free ride,” earning users and revenue.
Forrester analyst Dan Bieler’s comment hits the nail on the head: “Facebook offered $19 billion to acquire WhatsApp, a global messaging service with 55 employees, of which $4 billion is cash. This fact should terrify telecom companies. Ultimately, telecom companies may only be left selling unlimited data plans. The era of huge profits from high SMS margins is coming to an end, and there is no reason to believe that telecom companies can regain an advantage in the battle for closer customer relationships.”
The comparison of a company with 55 employees valued at $19 billion, while telecom operators with tens of thousands of employees and global networks see profits decline, is a brutal irony of the traditional telecom model.
Faced with this situation, operators realize that they must make fundamental changes. They need a new architecture that can quickly deploy new services, reduce costs, and enhance flexibility to compete with OTT service providers on an equal footing. Network Function Virtualization has thus been brought to the agenda in this context.
2.3 The Third Dilemma: Vendor Lock-in and Innovation Constraints
2.3.1 Strategic Passivity Caused by Dedicated Hardware
In addition to cost and competitive pressure, telecom operators face a deeper strategic dilemma:Over-reliance on equipment vendors, commonly referred to as “vendor lock-in” in the industry. This is not only a technical issue but also a matter of strategic control.
The 2012 white paper outlines how virtualization can ultimately break free from single vendor solutions—often referred to as monolithic or black box—towards a more streamlined and transparent infrastructure stack based on Commercial Off-The-Shelf (COTS) and open-source solutions, benefiting their collective business.
“Black box” is the core metaphor of this dilemma. Traditional telecom equipment is a highly integrated closed system, with software and hardware tightly coupled, making it impossible for operators to understand the internal implementation details, let alone modify or customize functions. Technical roadmaps, feature upgrade timelines, and product pricing strategies—all these critical decisions are in the hands of equipment vendors. Even if operators have urgent business needs, they can only wait for the vendors’ product planning and development progress.
Once a choice is made, it is difficult to turn back. This is the true meaning of lock-in. Due to the proprietary nature of interfaces, protocols, and management systems, operators find it challenging to switch to products from other vendors. Even if a vendor’s product is no longer leading in performance or competitive in price, operators still find it hard to switch. Why? Because the switching costs are extremely high—not only the cost of the equipment itself but also the retraining of thousands of technical personnel, adjusting the entire network architecture, and migrating massive configuration data. These high switching costs leave operators at a disadvantage in business negotiations with vendors.
The pace of innovation is controlled by vendors. The product development cycles of telecom equipment vendors are typically measured in years. From gathering requirements, product planning, R&D testing to final release, 2-3 years is the norm. In contrast, internet companies iterate their products on a weekly or even daily basis. When operators want to quickly respond to market changes and launch innovative services, they find themselves tied to a slow-moving vehicle, unable to accelerate.
Multi-vendor strategies also fail to solve the problem. To avoid over-reliance on a single vendor, many operators adopt multi-vendor strategies, procuring equipment from different suppliers. However, this brings new challenges: interoperability issues between different vendors. Non-standard interfaces, differences in protocol implementations, and the need for extensive integration and testing work between devices make the network more complex, increasing operational difficulties and slowing down innovation.
2.3.2 The Temptation of COTS and Open Source
In stark contrast to the telecom-specific equipment market is the landscape of the general server market.
Here, competition is robust, prices are transparent, and performance continues to improve under the drive of Moore’s Law. Commercial Off-The-Shelf (COTS) network devices (such as x86-based hardware) can meet general needs rather than custom purposes, providing capacity far exceeding dedicated network devices at a lower cost.Server vendors are highly standardized, based on a unified x86 architecture and standardized interfaces (PCIe, Ethernet), allowing for strong interchangeability. Not satisfied with Dell? You can switch to HP. Not happy with HP? There are Lenovo, Huawei, and Inspur.
Open-source software provides an even more enticing alternative. Linux operating system, KVM virtualization, Open vSwitch network components, OpenStack cloud management platform—these mature open-source projects provide a complete toolchain for building virtualized infrastructure. The 2012 white paper emphasized how to break free from single vendor solutions by transitioning to a more streamlined and transparent infrastructure stack based on COTS and open-source solutions.
By using COTS hardware and open-source software, operators can gain unprecedented autonomy:
- Autonomous selection: Choose and combine components from different suppliers, no longer bound by a single vendor
- Autonomous customization: Modify and optimize software according to their own needs, without waiting for vendor product planning
- Influence direction: Participate in open-source communities and influence the direction of technology development through code contributions
- Cost reduction: Enhance bargaining power, lower procurement costs, and reduce licensing fees
- Accelerate innovation: Shorten development cycles, quickly deploy new services, and enhance competitiveness
2.3.3 Moving Towards Openness and Standardization
The key to breaking free from vendor lock-in lies in standardization and openness. By clearly delineating different components and outlining their reference points, the ETSI NFV architecture framework paves the way for fully interoperable multi-vendor NFV solutions.
Standardization is not just a technical issue; it is also a process of reconstructing the industrial ecosystem:
Interface standardization is fundamental. Defining clear APIs and protocols allows different vendors’ VNFs to interoperate, just as internet protocols enable different brands of devices to connect and communicate.
Functional modularization is a means. Decomposing complex network functions into independent software modules, each of which can be developed, tested, deployed, and upgraded separately, eliminates the need for large-scale system updates that affect everything.
Ecological system construction is the goal. By promoting openness and standardization, attract more software developers, system integrators, and service providers to participate, forming a vibrant industrial ecosystem that drives continuous innovation.
In this way, operators can achieve a true “Best-of-Breed” strategy: Select the best components from different suppliers, combine them as needed, and build the network architecture that best suits them, rather than being forced to accept a packaged solution from a single vendor.
2.4 The Cumulative Effect of Three Driving Forces
Cost pressure, OTT competition, and vendor lock-in are not isolated issues; rather, they reinforce each other, forming a vicious cycle:
Cost pressure makes it impossible for operators to continue maintaining the traditional heavy asset model, forcing them to seek more economical solutions. However, due to vendor lock-in, they find it difficult to quickly adjust their technology roadmap.
OTT competition forces operators to improve agility and innovation speed to survive in market competition. However, the procurement and deployment cycles of dedicated hardware can take months or even years, making it impossible to compete with the rapid iteration of OTT service providers.
Vendor lock-in limits operators’ flexibility and innovation capabilities, putting them at a disadvantage in both cost control and market competition, further exacerbating the first two issues.
As the three pressures accumulate, by 2012, the telecom industry had reached a critical point where transformation was imperative. As a senior executive from an operator involved in drafting the NFV white paper stated: “We do not want virtualization; we must virtualize, or we will be eliminated from the market.” This statement captures the industry’s survival anxiety and foreshadows a profound transformation on the horizon.