The new business model – Everything becomes data but what does it mean for operators in Africa?
No-one can tell you how long it’s going to be but at some point all services – voice in particular – will be data. This poses enormous challenges to existing operator business models. African markets are seen as somehow trailing rather than leading this shift. So operators comfort themselves that they only have to hold the line and things will go on more or less as usual. Russell Southwood argues that this change will be on them faster than they think and they ought to work out what they will do about it.
The new business model envisages a world in which everything travels via IP (or some improved protocol). In this world, there will be two broad types of operators: those who provide data delivery and those who run services using data delivery.
Each of these categories may contain many sub-categories but the shift to data can best be understood by looking at these two headline categories. So at the user level, there will no longer be minutes, only a data package or allowance that the user has bought.
The challenge here is obviously the discrepancy between the value contained in what are charged for minutes and SMS messages and their data equivalent. Sending a friend a message via Facebook or What’s App is “free” except the cost of the data. This might be difficult to calculate but is a relatively insignificant cost. An SMS message charge is a great deal more expensive although again the underlying cost is relatively insignificant.
The same is true for voice minutes. An international minute to a popular destination now sells wholesale for fractions of a US cent but sells for tens of cents to the end user. Skype minutes are either free on a peer-to-peer basis or significantly cheaper when you break out into the phone system.
With the growth of Wi-Fi coverage, how long will it be before there is a phone that simply chooses the Wi-Fi data source rather than routing over the voice network? This will then leave the mobile operators with the road and any other form of “on-the-go” use.
The challenge for operators is that the amount of data being used is going up rapidly. This month Sprint has reported that Android users were using an average of 1GB a month and rising. In order to carry this data, the operators have to convert narrow band voice networks into high-performance data networks using largely IP. This capital investment has to be made at a time when data prices are falling.
Telecoms.com Intelligence Industry Survey 2013, revealed that more than two-thirds of telecoms professionals (67.5 per cent) believe that the move to LTE will change the relative standings of equipment suppliers as the network shifts to IP. New market entrants will seek to drive down the cost of equipment, service and maintenance and will be met by operators with open arms.
In this new world, operators will have to cease their lamentations about being a “dumb pipe” and start working out a business model for supplying data at high volumes to users at an affordable price. What everybody will want is a high performance data network that can handle new, heavy-data-use applications like video without the operator acting as traffic cop between different data flows.
There will a number of value-added services for this kind of data delivery including things like data centre hosting and back up but the main business will be high volume delivery of data.
There has much talk of tablets replacing PCs and on the continent people trot out the phrase that it’s a mobile continent. Deloitte has worked out that the average number of words a tablet user types is 500 in one go and it must be considerably less for mobile users. So unless we start using fewer words, nothing is replacing something: we will simply use more devices in more form factors to do different things.
For users, it’s only partly about the device and increasingly about the browser or interface. iOS and Android offer a rich pattern of apps that have content and services, whereas Blackberry’s OS does not. This may change in the years to come but users now are getting used to looking at packages of content and uses rather voice and SMS bundles. These are the current browser wars that are more important in many ways than handset market share.
The shift in power in company terms is from the old incumbents – the mobile operators – to those providing “Over-The-Top” (OTT) services using the Internet or data. These are the companies we all know more or less wherever we are in the world, except maybe in China and North Korea: Amazon, Google, Facebook, Microsoft (Skype), Twitter and Apple.
I can hear the sceptics rumbling in the front row: but what on earth does this have to do with Africa? I’d like to describe this reaction as “not in my village” syndrome. I remember clearly being at a conference where a highly educated African got up and said:”This broadband thing. It won’t happen in my village.”
Some 4 years later we are slowly but surely seeing a considerable number of broadband users. Although I’m sure they are not yet in his village, they will be before too long. The issue here is not that it needs huge predictive powers to see what’s going to happen. The direction of travel and the destination is quite clear, only the speed of travel remains the issue.
Among the key African 16-25 year old age group, the speed of travel is accelerating as they get access to new faster tools that allow them to view and read more of what they want. The arrival of Facebook as one of several social media networks operating at scale in Africa has taken a little over two years, although the process is not yet complete. In five years time, this key demographic will not have become any less techno-savvy and below them there will be another 16-25 year cohort that is even more techno savvy than they are. Age will remorselessly reshape the assumptions we make about the market.
Many talk about LTE as if it was somehow well over the horizon for most operators in Africa, muttering darkly about when affordable handsets will be available. They have forgotten the speed of the cycle of change with 3G. New, faster phones will drive demand that will speed up the arrival of cheaper phones and modems. On the latter, LTE can easily deliver into a Wi-Fi cloud.
So what are things that these users will want? High at the top of the list are video (music, film, sport); video calling; and network gaming. But also lower bandwidth services like books to read and the equivalent of iTunes for Africa. This will not simply be the international versions of all these things. As elsewhere local or regional variants will spring up and Africa is no different with platforms like Eskimi, MXit, 2Go and biNu.
So if this is the sort of thing African users will want, what does the operator do about it? And here, there’s a fork in the road. All these changes imply some kind of relationship with content and services. With their largely under-powered VAS departments, mobile operators don’t seem to grasp that this is something that is well beyond their understanding. Much of the existing SMS content comes from the same underlying providers. Being able to say what does well on your network is not the same as being able to choose good content and services for the future: following elsewhere is not leading.
Therefore, operators need to think in the medium term about a world in which others provide content and services. The outrageous deals in terms of revenue splits on SMS may stay in place for the short term but will be steadily replaced by “over-the-top” services using the Internet. SMS will remain a part of Africa’s landscape for longer than elsewhere so why not set up a separate SMS content company with an existing VAS operator?
The next fork in the road is the attitude to data pricing. Currently users are largely encouraged to buy data allowances. These are an immense improvement over what went before but still reflect the mentality of “selling shortage”. The user finds it hard to guess (despite a certain amount of advice from the better operators) how long their allowance will last. Therefore their use of data is cramped by this invisible barrier. All operators now have access to large amounts of international data and need to sell it so their network need to have the ability to deliver it as quickly as possible.
Operators need to shift to a position where packages reflect a desire to see the user make maximum use of the service rather than ration themselves. Access to video will be the test case for this because the point of having an LTE service for the user is that it can do these kinds of things. (See Ije Nwokorie, Wolff Olins on early lessons from helping launch EE's LTE service in the UK:)
The new African operator will be the one that can provide reliable up-time (against all the challenges) at a price that users will be able to afford. This means that legacy voice operators will either buy into this kind of network (like an MVNO) or need to build their own data networks. However, the market dynamic is against too many networks being built: you need high volumes of data traffic to create the kind of high volume, low price packages that are required.
The new African data operator will work with a combination of international and local brands. A typical day for a Manager might include talking to his Skype account manager about the roll-out of a new video voice mail message service and to someone like iROKO about helping optimize their video delivery. The business will be data sales and anything that makes data use easier.
Obviously this new type of African data operator will find fertile ground in more liberal markets like Nigeria and Kenya. The regulatory restrictions in countries that protect both the old incumbent (the former or still state owned telco) and the new incumbents (the larger mobile operators) will make this a much slower process. But this is not different from the situation now where countries like Kenya and Ghana are at the front of the liberalization train, whilst places like Ethiopia and Djibouti are in the guards van that got disconnected somewhere back down the line.
In terms of content and services, there will be three different types of players: the international brands identified above; regional players who have something (eg Nollywood content) that can travel across the continent; and highly local players operating in one or two country markets. The latter may be vernacular language players using say Swahili or Hausa to offer something culturally very targeted.
The business model for these kinds of companies will fall into two categories: advertising supported or transaction based. It is hard to imagine a world in which advertising will support online activity in Africa. Wherever expenditure is tracked, it falls well below the 5% threshold. However, SMS campaigns are not included in these figures.
Nevertheless, in a growing number of countries, the main print companies, newspapers, are looking at a position where the number of online readers in their country exceed even the rather exaggerated numbers of readers per copy they feed their advertisers. Unlike India, where print newspapers are currently undergoing something of an expansion (reaching out to different social classes), Africa’s newspapers seem hemmed in by high print and distribution costs. So they will have to find ways of making sense of online very soon. (See Tobias Osmund, AP on how Sweden's Aftonbladet newspaper has made a success of going online:)
The second of these two potential business models – transaction based – again brings us back to the current incumbents, the mobile operators. They will continue to hold on to the SMS-based payment systems but lose fairly quickly the Internet-based payment systems unless they behave differently.
Instead of saying that everything has to be controlled by us, they need to be building long-term relationships with companies for whom SMS-based and online payment is a huge money saver. As with data, the transaction charges need to be low and the use high volume and work on the basis that they will encourage everyone to use these systems. As with the SMS split, they need either to allow a far greater proportion of the revenue to go back to the company using the transaction process or see this business go out to independent gateway companies.
The big question is whether the kind of online shopping culture will take off, driving these kinds of transaction-based businesses. The early results from Lagos look interesting but it’s too early to say. Nevertheless, I can’t believe that there aren’t young single males out there who want to order a pizza or whatever local equivalent delivered to their door. Also, the current retail offer in most African cities (whether shops or markets) makes it difficult to find certain things or know whether they are in stock before you’ve spent half an hour tracking across the city. This provides fertile ground for online retail and habits change over time.
In my judgment, the essential of these changes will be in place in under five years for Africa’s more developed markets. Five years is within a single business planning cycle so you ought to start preparing yourself now.
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Preparing for the new business model:
Nyasha Mutsekwa, CEO, Metvafrica.com on its Pan-African VOD service
Simbarashe Mabasha, Wabona.com on this new South African VOD platform
Jesse Oguntimehin on the beta phase launch of African mobile music platform Spinlet
Chike Maduegbuna on Afrinolly, a new film and music mobile platform
Tayo Oviosu, CEO, Paga on the mobile money market in Nigeria