All Communications Services Are Not Created Equal – Substitution of OTT Communications Services for ECS from a Consumer Perspective

Abstract

In various national markets for communications services, fundamental changes in usage patterns can be observed. Commonly, usage of traditional electronic communications services (ECS) i.e. telephony and Short Message Services (SMS) is declining, while user numbers of Over-The-Top (OTT) instant messaging services like WhatsApp and Voice Over Internet Protocol (VoIP) services such as Skype are increasing.

This suggests, but fails to prove a substitution of OTT communications services for ECS and prompts Internet Service Providers (ISPs) to demand a level playing field. On this backdrop, our paper is the first to add specific consumer behavior insights to the policy debate that so far largely revolves around technical and legal arguments.

It builds on a literature review of communication behavior, a representative online survey (n>1,000) of consumers in Germany in November and December 2015, and more than 20 in-depth interviews.

Although 77.9% of consumers use OTT communications services, only around half of them primarily substitute them for ECS, while the other half uses OTT communications services complementary. Consumers who do not use OTT communications services split into 12.8% whose usage patterns remain unchanged and almost 10% who substitute only among ECS.

To shed light on consumer characteristics that foster the use of OTT communications services, typical sociodemographic variables such as sex, age and household income were checked using linear regression analysis alongside variables describing consumers’ general telecommunications consumption behavior such as their type of mobile contract and contractual Internet bandwidth. The dependent variable was the summed shares of OTT communications services usage across telephony and messaging as reported by the respondents for the last month.

Five variables were identified as having an impact on consumers’ usage intensity of OTT communications services. Consumers show less usage with increasing age (t=-3.9). However, their OTT usage increases with their reported household income (t=3.1), if they use a smartphone (t=8.8) and are Apple users (t=3.4). Finally, those who have recently purchased more high-speed data volume for their mobile Internet also use more OTT communications services (t=2.6). Overall, after eradicating 53 outliers based on Cook’s distance, the model appears to be well-specified (N=638; R²=.256; Adj. R²=.250; F=43.55) with almost normally distributed residuals.

Our qualitative results reveal that OTT communications services serve as a like-for-like substitute for ECS in some consumption situations, while the novel functionalities they offer make a significant difference from a consumer’s perspective in others. Most importantly, various functionalities enable levels of immediacy and intimacy different from ECS.

Our paper’s key insight for policymakers and regulators is that apparent changes in consumer communication behavior do not necessarily reflect a substitution effect. Instead, our results point towards an evolution of communication behavior triggered by technological innovation. Thus, the urgency of creating a level playing field may be questioned. Additionally, our results indicate that a higher usage of OTT communications services is in fact not to ISPs’ detriment as those who use them most intensively are also the ones purchasing more expensive ISP services.

Keywords: Competition, Consumer Behavior, Telecommunications, Regulation, Communication Industries, Internet Economics, Internet Services, Technological Change, Technology Adoption, Regulated Industries

JEL Classification: L510, L860, O330, K230