[#9] Unbundling of the Telcos
Probably Airtel & Vodafone's biggest threat(s) existed way before Jio arrived on the scene
Authors’ Note
The community continues to grow and the last piece we wrote about reimagining governments as platforms got a lot of praise. If you’ve not read it so far and would like to give it a read while sipping some coffee this weekend, here’s the link. And sincere apologies for not hitting your inbox as frequently as we’d have liked to. We offer no excuses but seriously hope to make it up to you all with the quality of some of the upcoming posts.
About this week
The Indian telecom sector has been more active than the ball in the famous 3D Pinball Game in the last quarter. The youngest telecom operator in the country, Jio, is now the dominant player in the space. It amassed a mind-boggling total of 392 million 4G users in just five years. To put some perspective, Jio leads its competitors by 70 million users. And with its parent company mopping up over $20 billion in funding over the last quarter, one would expect the domination to continue.
But even as Jio prepares itself for the impending 5G auctions expected to happen in 2021, the competition is also sharpening knives. Airtel inked a multi-year, mega partnership with Amazon Web Services to deliver intelligent cloud solutions to large enterprises and SMEs in India enabling them on their digital transformation journey. While Airtel is on the offense, the board of Vodafone-Idea has approved a huge fundraising endeavor through debt and equity.
It’s important to note that the entire userbase of Jio comprises of 4G users who are (presumably) more accustomed to online transactions while a decent fraction of the users of Airtel and Voda-Idea are still 2G and 3G users. This makes a huge difference, the details of which we’ll dive in shortly, as it lends Jio a technical advantage. An excerpt from this brilliantly detailed piece by Vivek Raju:
Jio has to maintain only one network (the one for data) while others have to run one network each for voice and data. Equipment needed is much lower for Jio hence lowering their cost. Also, the voice networks that others have to run are old (decades-old tech!), energy inefficient, and occupy a larger real estate footprint. This really shoots up their cost, a cost that Jio entirely bypasses. Nokia, which now focuses on building and managing these networks for telecom companies estimates cost savings of 50%+ on shifting from a 2G/3G architecture to a data-only 4G architecture.
The implications here are two-fold -
Jio’s 4G network changed how users consumed the internet. A massive increase in the number of views/likes on new Bollywood songs on YouTube released post-2016 and the ever-increasing number of UPI transactions are two outcomes most would relate to.
While the cheap data costs (<$1/GB vs competitors' average of $3.5/GB) helped acquire users, the introduction of entertainment apps (JioNews, JioTV, JioSaavn, and JioCinema) on top, allowed the users to spend all those GBs of data there creating a hook. Interestingly, Jio lured the majority of its early adopters leveraging their vacant 2nd SIMs in their smartphones.
While this post is about telcos in general and not just Jio, it was important for us to use relatable examples to understand the context better. Fortunately (or unfortunately), to unpack the intended key learnings of this piece, we’d have to fall back on the cushion of platforms. If this is the first time you’re reading about platforms in our newsletter, here’s a quick primer (only the first couple of sections) to help you jump start.
But first, if you’re coming across this post from an external source, please take a moment and consider signing up to get such insights delivered right to your inbox.
The Rise of Over-the-Top Service Players
If you’re in your early 20s, you’d probably remember rushing to the nearest offline SIM recharge store to get an SMS pack to message your high-school sweetheart. Yes, SMS packs existed until very recently and a lot of us have lived in a world where we dreaded the possibility of WhatsApp becoming a paid service. And I’d prepared for my JEE exams locking myself completely away from the internet, forget using Unacademy for preparation. There’s clearly a generation gap and am I the only one feeling old?
But I digress.
Historically, telecommunication companies have operated as value-chain/product businesses, providing their communication platform as a service. Usually, this value chain includes the infrastructure, connection services such as TV and Internet subscriptions, hardware receptacles (cable boxes and proprietary routers), and even some software to run certain communication platforms—especially email, phone lines, and conference lines for businesses.
They’d dominated this space for some time. However, smaller, nimbler players have been able to build competitive offerings that are gaining significant market share in several of these individual value-chain components leveraging the infrastructure of the telecommunication companies. These are called over-the-top (OTT) companies.
WTF are OTT service providers?
OTT providers are usually confused with OTT content providers like Disney+ and Netflix. A simple definition of the OTT players would be that they’re not present in the entire telecom value-chain and yet they attack specific chunks of it by offerings services and platforms at the end of it with a B2B and a B2C business model.
OTT refers to the delivery mechanism and the business model of these service providers, opting for CPaaS (Communications Platform as a Service) and UCaaS (Unified Communications as a Service) products over the Internet that circumvents/bypass the value chain of the telcos.
Some of the popular OTT players include -
Twilio provides API integrations to build enterprise software without heavy coding skills.
Slack handles office communications
DropBox handles cloud storage
Netflix offers video for the consumer market
Shopify helps provide eCommerce solutions
Facebook created an advertising platform
Roku aggregates video content services
Skype provides VOIP calls
WhatsApp and Facebook Messenger help users exchange messages between them
Zoom allows users to interact on video
B2C models are usually transaction platforms while B2B models become innovation platforms, think Shopify, or Twilio where the platforms open themselves up to encourage citizen developers to come in and develop solutions on top of them. This inherently keeps making the platform better with time.
The OTT threat to telcos
CPaaS: A Communications Platform as a Service allows developers to add voice, video, & messaging to their apps without having to build a real-time communications stack.
UCaaS: Unified communications as a service (UCaaS) is a cloud delivery model that offers a variety of communication and collaboration applications and services. Think of it as something that allows enterprise messaging, online meetings, team collaboration, telephony and video conferencing, all rolled into one.
With a razor-sharp focus on customer needs, OTT service providers worked on solving specific customer needs in a single market niche with a lean set of features. They leapfrogged the value-chain business model and have jumped into the CPaaS & UCaaS bandwagon right when the growth was rapid.
Let’s take the example of Twilio. It offers a suite of APIs that let enterprises build their own versions of commonly available communication platforms without having to write a lot of code. This clearly attacks the revenues telcos were earlier extracting out of a call center.
Think about it, most businesses used to outsource their customer support operations to BPOs. These BPOs used to subscribe to a lot of infrastructure equipment from the telcos to run their center 24x7. But Twilio has made it way easier for companies to create programmable call centers using technology.
Sure, Twilio’s pricing does include aspects of the underlying infrastructure owned by the telcos but they command additional margins by providing incremental value-added services. Again, the implications are two-fold -
In a way, Twilio acts as an interface between the telcos and the customers. This takes away the leverage the telcos earlier had.
Twilio also reduces the role of a telco to being a utility. So long as the job is done, customers wouldn’t mind which telco they’re using at the backend.
Twilio is just one particular example and we like it because it powers all the major communications you receive when you use Uber. The same principles can be extended to other solutions like Zoom, Skype, Google Meet, and even Netflix. Netflix has a dark model (in my opinion) of using fast.com to let users measure the speed of the content being delivered from Netflix’s servers to them. Doing so, they push the users to pressurize the telcos to subsidize the underlying infrastructure costs of providing content to the users. Big tech companies like Facebook and Google spends billions building up the internet infrastructure in the world while Netflix smartly puts the blame of the failure on the telcos.
The major reason why OTT platforms have been able to eat away the revenues of telcos is because of the ideologies of the telcos to provide anything and everything to the end-user. This is where the focus of the OTT players triumphs.
Opportunity and Opportunity Cost
Clearly, the telcos model of end-to-end ownership doesn’t replicate the levels of dominance they’re accustomed to. Worse, while telcos are remaining confused about what they should do next, OTT service providers are taking radical measures to provide a differentiated offering to their end consumers.
The idea of collaborating/integrating with a competitor is not something that the telcos would usually entertain. On the other hand, we have OTT providers like Slack and Notion who integrate their offerings with competing platforms to provide a more compelling experience and convenience to the users.
OTT players recognize that no single player would be able to provide all the services that the telcos can but relatively easy to use integration features help them circumvent this. Another interesting idea is to open up their platform(s) as an innovation platform where other citizen developers can provide interesting applications on top. Microsoft Teams allows the same while Zoom has created a marketplace.
But can telcos compete? If so, how? I can foresee two strategies here -
Direct Competition: This is a classic brute force strategy where the telcos try and enter the end space themselves. Most telcos have the resources to build products and services that match their offerings end-to-end, line for line. And in such a scenario, markets can be won with predatory pricing and brand name. Jio pulled this off perfectly among the telcos but a relevant example is that of Facebook. When Snapchat was gaining market share thanks to its new stories feature, Facebook decided to copy the same and introduce it inside their family of apps giving their existing userbase fewer reasons to switch.
Acquisitions: Nimbler players could be acquired by the big telcos in the form of strategic acquisitions. Some notable ones include this and this. And as Jio has demonstrated, it’s not a bad idea to think horizontally as well with acquisitions.
Bill-on-Behalf Partnerships: Most OTTs might not be up for a sale and telcos should explore creating mutually beneficial revenue opportunities leveraging all the advanced billing technologies. This is something we call Bill-on-Behalf in the business jargon and it is increasingly popular in Platform as a Service business models where integrations are concerned. Telecoms are uniquely positioned to take advantage of that by partnering with OTTs to create usage-based billing models for everything on top of basic subscriptions, including:
Streaming video
File storage space
Value-added service bundles
Integrating collaboration tools
There is no turning back now. With the stunning successes of companies providing OTT services and the disruptive impact companies like Twilio/WhatsApp/Zoom are having on telcos/CSPs and enterprises today, it’s imperative to rethink, redesign and roll out digital real-time services that are made better – and more secure – on carrier-grade network infrastructure.
Telecoms still control most of the value chain, and leveraging that will be key in monetizing the market that OTTs have rushed to claim. Telecommunication enterprises have multiple options to monetize the CPaaS and UCaaS vertical, but they will face stiff competition from established over-the-top service providers that continue to entrench their positions with value-added features and integration capabilities.
So will this be the moment of reckoning? Will the established telcos be disrupted? We don’t know. What do you think? Let us know in the comments.
Interesting things to read, listen to, or watch this week
Rahul’s newsletter has really interesting perspectives on how India Stack can help Insurance
Why Jio wants to kill 2G in India!
Is coding necessary to stay in the jobs of the future?
Kunal Shah’s take on the early-stage startup landscape in India is a classic
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