Startup Disruption in Telco
Last July I wrote a post and deck called ‘The Effect of Software People on Telco’. It was pretty well received, getting some 4,200 views on Slideshare over the past 7 months.
I needed to update it to reflect the constantly moving landscape and add new data, however I found the full deck reaching more than 70 slides. Not only was this becoming a headache to maintain, it was also far too long and complex to present in a typical 30 minute speaking slot.
I was also aware that there are two very different audiences for the content. The first is an entrepreneurial crowd, for whom this provides a case study on how to spot disruptive opportunities in established industries and identify common traits of the successful startups in the space. The second is the Telco audience, here the focus is on the ideas and concepts that will help them flourish in this new software driven world.
With that in mind I have decided to split the content into two distinct presentations. The first part is below, and focuses on the entrepreneurial view. I’ll post the second part from the Telco perspective in April.
The talk focuses on the Telco industry, but the lessons apply equally to any industry that has grown complacent. And of course complacency presents an opportunity for disruption. The Facebook acquisition of WhatsApp happened while I was preparing this new version, and a tweet by Paul Graham nicely summarised the theme of the talk in less than 140 characters.
One lesson from WhatsApp: Abusive monopolies create a lot of potential energy.
— Paul Graham (@paulg) February 20, 2014
The old Telco business model is increasingly broken. People no longer wish to pay a premium to talk on the phone. Telco revenues peaked in 2007 and have been declining ever since as market forces and numerous alternatives present themselves to customers.
Hakam Kanafani, CEO of Turk Telekom, said in February 2013:
Voice is God’s gift to humanity. It’s what differentiates us from the animals. And we position voice at zero — you don’t have to pay for voice. Voice is dead.
Telco’s have been build on this core value proposition of allowing people to talk to each other. Increasingly this value proposition has no perceived commercial value. More worryingly the quote hints that there is no plan B. Once people find an alternative to paying the Carrier for voice services they hit a major problem. This lack of innovation is not uncommon where you have dominant market share and little competition – to Paul Graham’s point.
However, do not under estimate the size of the Telcos. These are incredibly efficient cash generation machines. AT&T for example generated $126 billion in 2012. If you put that into context Sony made $79 billion, Coca Cola $48 billion, and Nike $24 billion. Fun fact AT&T produced double the GDP of Luxembourg in 2012.
In fact there are very few industries on the planet that generate more revenue than telecommunications. Only the oil companies, Walmart and Toyota significantly out gun the Telcos.
Where then do these upstart internet companies rank compared to the Telcos?
Actually, apart from Google, it is hard to plot the revenues of the leading internet companies on the same chart. Facebook made $5 billion in 2012, Skype $700 million, and Twitter $300 million.
However, the real nub of the problem is the collective impact the new entrants are having, not the comparative size of individual companies. By 2016 the Telco’s are forecast to lose $106bn to the combined impact of the OTT players. Also it’s not just the cannibalisation issue on their direct revenues that pose a serious problem for the Telco’s. They are also burdened with the cost of upgrading and expanding their network infrastructure to cope with the increasing data demands of customers using OTT services. If that was not enough, when customers have a problem they can’t call WhatsApp for help – they call the Carrier. This customer service cost is also significant for the Carrier.
With such hospitable conditions for disruption, a veritable feeding frenzy has developed. Many startups are smelling blood in the water – there are now over 50 social messaging apps with more 1 million downloads in the Google Play store, and the leading ‘names’ in the space continue to grow at a fast pace – Skype has 280 million active users, WhatsApp 465 million and WeChat 236 million.
Lets look at some of the common characteristics of these disruptors.
To illustrate UX, lets compare the Telco approach to mobile picture message to the startup approach to mobile picture messaging.
The mobile operators launched picture messaging back in 2002 – they catchily called it MMS, and the volume of picture messages never really matched expectations.
Why did Carrier picture messaging under perform?
- Firstly they framed the user experience in what they knew – SMS. MMS was just seen as an extension of text messaging – adding media to an established use case – rather than an opportunity to create a whole new experience.
- Secondly the mobile industry spent years on standardising the experience – a process which removes all the bells and whistles to drive commonalty which leads to vanilla. The Carriers were more worried about catering for everyone, rather than creating the best possible experience – lots of energy was expended looking backwards, for example how could a user with a non MMS phone receive and view a photo via a website.
- Thirdly, greed. MMS was positioned as a premium service. The pricing model did not encourage the casual exchange of photo’s and the Telco reverted to type by creating complex pricing tables and message bundles. Even today – 12 years on from launch and with hundreds of free alternatives on the market – Vodafone still charges 36p per picture message (and boy did I have to hunt for the actual price, I gave up on O2’s website)
- Finally, the MMSC vendors and handsets OEMs did a horrible job of actually implementing those vanilla standards so reliability was very poor. Customers often needed to manually configure the network settings in their phone to work with the Carriers MMS service.
Contrast that with the strategy Instagram took. They gained 80 millions users in 2 years and grew a billion dollar business by focusing on delivering a great user experience on just one phone – the iPhone. The addition of filters and a community around the photos made the experience of shooting and sharing photo’s fun and rewarding.
Speed and Agility
The traditional telecom industry has been built on long periods of time between radical innovations. Stability is favoured over experimentation. If you think about radical changes in how humans communicate, we really have only seen 3 major step changes in telecommunications – The telegraph in 1838, then 38 years to the telephone, then 108 years to the mobile phone.
Of course there are smaller incremental changes in transport like VOIP, but the fundamental user experience has been stable for incredibly long periods of time.
So when the Telco’s suddenly faced this explosion of competition from people outside of their world, it wasn’t just the quantity, it was the speed they were moving at. You can begin to see why the Telco’s have become punch drunk.
The slow and steady approach gave rise to heavy standardisation and waterfall product development processes where it would take 18 months to bring an idea for a new service through to market. Consistently the Telco’s found themselves wasting millions of pounds on NPD only to bring something to market that was already obsolete.
So much of the problem is deeply rooted in the DNA of a Telco company.
Marc Andreessen was right about software eating the world, especially when it comes to Telecommunications. The innovation void is being filled by software people, not Telco’s. Software people think web first. This style of thinking is inherently open. Software people think collaboratively – APIs, collaborative tools like GitHub, and open source development. Software people think about building communities & ecosystems.
Contrast that with the mindset of a Telco. They have to buy a license to operate in one geography. They have to buy a network. They have to attract customers. They have to retain those customers. They have to monetize those customers. Its a very insular and defensive mindset.
The Telco industry has never developed its equivalent of the World Wide Web. There is no innovation layer to create the services people love, like Facebook, Google, YouTube, etc. The Telco world needs that innovation layer to enable 3rd parties to build valuable services using the assets of the Telco.
The Telco mindset of control has been proven to fail. They have controlled access to their network, and have not effectively collaborated with other Telco’s on the creation of new services. Before the iPhone and the App Store, the Carrier controlled version of the mobile web was one driven by commercial motivation rather than providing choice.
Remember the Paul Graham tweet? When you have a closed industry its not in any of the competitors interests to reduce prices, so you get artificially high prices, with each of the players being happy to maintain their margins. Yes prices reduce, but over long periods of time. The price of a 3 minute transatlantic call has fallen from $1,000 to $0.21 but that has taken 83 years. Nothing had prepared this cosy industry for the arrival of free, in the form on Skype. That is why in just 11 years Skype now carries 4 in every 10 international voice minutes.
The desire to milk the cash cows means large successful companies take their eye off the ball and fail to spot new trends and new user behaviours. Even though all of these companies spend millions of dollars on market research, they very rarely implement any of the insights gained. Often the implications are just too scary or disruptive. Then one day you wake up and realise people no longer need your service.
The latest research from Ofcom shows that UK kids aged 12 – 15 make just 27 phone calls per week, compared to sending 311 text messages (low margin for the Carrier) and 192 OTT App messages (zero revenue for the Carrier).
Neelie Kroes, European Commission Vice President, said
The fact is time is racing on: the economy is declining, technology is moving ahead and so are other parts of the world. The telecoms sector hasn’t had its ‘Lehman’ moment yet. But with declining revenues, rising debt and dated business models, I worry about that happening.
So what can the Entrepreneur learn from this?
- Search for complacent industries with high margins and poor user experiences. This creates the most fertile opportunity for disruptive new entrants – Remember more than 50 social messaging apps have more than 1 million downloads in the Google Play store.
- Don’t just talk to your customers, implement what they tell you. Never get blinkered, regardless of how scary the implications may be for your cash cows.
- Keep your eyes open. See how new technologies, new user experiences, and new business models are evolving – not only in your sector, but also in adjacent sectors.
- Think about your DNA – create and nurture communities and ecosystems, and play nice with others. Increase your chances of success by integrating into other ecosystems – become de facto standard.
- Ensure your business model is multi faceted – don’t have all your revenue in one product line, or one model, or one customer, because..
- Change is inevitable. Anticipate change – have a Plan B.
Get this right and the pay off can be huge. A large number of startups targeting the Telco space have had successful exits. WhatsApp sold for $19bn, Skype have sold twice for $2.6bn and $8.5bn, and Viber for $900m as an example.
Lets close by looking at the WhatsApp acquisition. I’m not going to comment on the price paid, but think about what we have covered in this post / deck. Facebook have such dominance they could easily slip into a similar mindset to a Telco, however they are doing the exact opposite.
To his credit Zuckerberg recognises their strengths and weakness and is acquiring the pieces he believes he will need to keep Facebook innovating and leading. Facebook were under performing in Youth, Emerging Markets and Mobile – he is making decisions at internet speed and buying not building.
What’s even more impressive is Facebook are resisting slipping into an arrogant position of thinking they know best. They have an army of some the worlds best engineers, yet they are resisting the temptation to think they can drive innovation exclusively from within.
Quite different from the behaviour we have been witnessing in the Telco world for the past 5 years.
Its clear that Facebook want to be the next Facebook.
Stay tuned for part 2.
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