Tolls on the Bridge Over the Digital Divide? An Economic and Regulatory Analysis of Over-the-Top Services in a Developing Market

Abstract

Over-the-top (OTT) services are value-added applications such as streaming media, messaging, or voice calling that utilize service provider networks for delivery without being under the control of the network service provider. In many cases, the OTT services compete with services offered by the network operator themselves, such as when consumers use VoIP services like Skype or messaging services like WhatsApp instead of voice calling or short message service (SMS) offered by mobile wireless carriers. In most countries, network operators are under statutory obligation to carry OTT traffic, and while they may receive revenue by charging for this carriage at the rate of regular data traffic, they forgo the higher revenues earned by charging for calls or messages directly. While this has been a boon for consumers, it is having negative impacts on the revenues, forecasts, and infrastructure investments of network service providers. The issue of infrastructure investment is particularly sensitive in developing countries, where the need to create new infrastructure is substantial, it is difficult to attract investment, few alternative service providers exist if an incumbent leaves the market, and average revenue per user is already relatively low. Regulators in these markets face difficult choices due to the desire to bring better and lower-cost services to underserved consumers while also encouraging competition, innovation, and investment in infrastructure. The rapid introduction of OTT services has affected the long-term revenue forecasts for existing service providers, challenging the models used for existing infrastructure investments and payback periods. Telcos and network service providers are also being forced to consider new business models for the future, including changes requiring regulatory approval. In this paper, we consider the case of Rwanda, where we analyze data collected directly by the telecommunications regulatory authority. Using a quantitative and qualitative mixed-methods approach, we investigate the economic and regulatory impact of over-the-top services on the mobile telecommunications market in Rwanda. This data is used to analyze and predict future revenue streams from traditional and value-added sources. This analysis is used to consider the evolving business and revenue models necessary to support ongoing operations and future investment, and regulatory changes that may be required to enable this evolution. The analysis serves a model not only for Rwanda, but for many developing countries facing similar questions around the impact of OTT services on revenue, predictions, infrastructure investment, competition, and appropriate regulation.