First let me briefly explain my background and why I am so fascinated with this topic.
I have spent my entire career working at the intersection of telecommunications and software. I have built and launched products inside major Telcos like BT, O2 and Telefonica. In addition I have the perspective of working in a disruptive telecommunications start up – Twilio.
I have also worked and advised organisations seeking to share best practice and connect these two worlds together. I was the founding chair of the Chartered Institute of Marketing’s Technology Interest Group, and served a two-year term as a Global Board Director of the Mobile Entertainment Forum.
Hopefully this gives me perspective on the challenges and cultures of all the players involved in shaping the next phase of Telco.
Now lets define what I mean by “Software People”
It could be described as a set of beliefs, not technical skills. A mind set rather than a skill set. Importantly you don’t have to write code to be a software person. You could be a designer, a project manager, a business person. The important point is you see the world through the lens of software. A software person asks, “How can this problem be solved by software?” and a software person believes any problem can be solved by software.
There has never been a better time for Software People. There are more tools, more support, more focus, and lower barriers to entry than ever before.
There are some great examples of Software People solving problems through software.
The traditional remote control for a TV is not designed by Software People. It has on over whelming number of single function hard-wired buttons. Its function, capabilities and purpose never change from the day it leaves the production line to the day you throw it in the recycling bin. Contrast that with the Apple TV remote. Minimal design. The power and function is in the software. It can be updated and improved via Apple TV software updates.
The typical credit card machine is single purpose and complex for both the operator and customer. I still incorrectly tip, as entering the value of the tip is counter intuitive. Contrast that with Square who created a beautiful UI that turns iOS devices into intuitive payment terminals. Great for both the operator and the customer.
I can only turn the temperature up and down on my home thermostat. If I want to do anything more complex than that I would have to go and find the manual. Nest is a learning thermostat by Software People.
Uber, and many of the other cab applications out there, are turning a horrible experience into a great experience. Removing the uncertainty of hailing a cab and putting the customer in control with real time mapping and regular communication exchanges, plus of course simple payment options so you don’t have to worry about carrying cash.
So that gives you a flavor of Software People and how they have solved problems through software. So what has that got to do with Telco you may ask?
You may even be asking why should you care?
Well step back a second a think what it would be like if you couldn’t make a phone call, or couldn’t access the Internet from your smartphone when travelling. Communications continue to underpin or business and personal lives. The human need to communicate remains hugely valuable.
In the UK we placed 240 billion minutes of voice calls in 2012. The UK is now a mobile first country with 51.6% of those minutes delivered over Mobile networks.
The reach of services provided by Telcos is phenomenal. Nearly 6 billion people have access to SMS worldwide. That is 6 times more than Facebook, 3 times more than TV and 2.5 times more than email.
So if our appetite for communication is this vacivious, then what is the problem?
Unfortunately for the Telcos, the old 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 alternatives present themselves to customers.
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 oil companies, Walmart and Toyota significantly out gun the Telcos.
So where do these upstart internet companies rank compared to the Telcos? To have sent so many people into a doom-laden tailspin they must be rapidly overtaking, right?
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, before compliancy creeps in, the decline in Telco revenues is predicted to continue. Its less about one or two internet companies growing to the size of the Telcos, more the net affect of hundreds of nimble players all collectively chipping away at the Telco revenue stream.
So lets take a look at these new entrants.
There has been an explosion in messaging apps that use the Telcos mobile data connection to send peer to peer messages. Often called ‘Over The Top’ Apps, or OTT. The market leader is Whats App which has hit 27 billion messages per day. It’s been estimated that the combined monetary impact of these OTT messaging is $23 billion in lost revenue for the Telcos in 2012 alone.
Blackberry BBM leads the way in terms of messages sent per week at 110, with SMS holding second place against a rapidly closing Whats App. There is an interesting trend for SMS to relegated to a backup messaging medium when the OTT messaging app of choice is not available e.g. no data connection, roaming, etc.
These assaults on the Telco cash cow are not new. If you look at the effect of competition, regulation and other market forces on an historical premium product like transatlantic calling, the average cost for a 3 minute call dropped from $1,000 in 1927 to $0.21 in 2010. Telcos are used to operating in tough market conditions and always seem to find a way to innovate with new marketing bundles and deals.
What is new however, is this new generation of competitors are not fellow Telcos. They are a new breed with different DNA and a different set of rules. For the first time the Telco faces trying to figure out how to position themselves against zero priced competitors, which also happen to increase the load on the operators data network as they become more popular – a real double whammy.
We see evidence of this in the growth of Skype’s share of international minutes.
The triple whammy for European Telcos is this is happening right at a time when the European regulator is becoming more interventionist with mandated reductions in a traditional Telco cash cow – international roaming.
And the challenges keep coming.
Even partners that the Telcos rely on like Apple are launching increasing numbers of services which threaten core Telco revenues. Apple iMessage now sends 2 billion messages per day, and reinforces the mindset that SMS is a backup service by offering to fall back to SMS when an iMessage cannot be delivered. A little discussed announcement at this year’s WWDC was the extension of Facetime to support audio only calls. This means than an iPhone customer connected to WiFi can now use unlimited free text and voice without ever touching the Telcos mobile network. How long before an iPhone comes with the SIM card as optional?
Another communication innovation led by Software People is WebRTC. Now your web browser becomes a fully featured communications device. Another significant challenge to the Telco proposition.
This has led to the forming of a new telecommunications landscape. The traditional network providers and the Software companies. It is worth noting however that not all software companies are a like. Twilio actually partners with Telcos so that every minute of voice or text message sent over our API actually generates revenue for the Telco partner. In addition there is a channel and marketing partnership where the Telco can market our API directly to its customers, as evidenced by our recent launch with Japan’s KDDI.
So lets take a look at why these software companies are having such an impact.
Firstly Software People create better user experiences.
If you look at the mobile services that are growing in popularity, they are the ones created by Software People – IM, email, Social Networking, VOIP, etc.
Instagram is a case in point. I launched picture messaging (MMS) for O2 back in 2002 – I look at Instagram with a mix of envy and admiration, as they executed picture messaging correctly – a great focused user experience compared to the Telco approach of trying to standardize an experience across hundreds of handsets and Telcos. That thinking only leads to vanilla, not awesome, experiences.
Whilst MMS continues to under perform (due to poorly implemented standards, bad or little marketing, device support, premium pricing, unreliable cross network delivery, etc) Instragram which was built by people who’s first camera phone was the iphone in 2007 (a decade after MMS was being conceived) grew into a billion dollar company in just a couple of years.
Consequently the demand on the Telco is changing. The unit price of core services is continuously dropping, but volume is exploded. The future Telco will have to excel at running profitable networks - low margin, high volume.
Unfortunately for the Telco exec expecting to operate at 70% margins, the decade long internal conversations about how to avoid being relegated to bit pipe seem to be over.
Thanks to the services created by Software People, customers are now hungry for data. Some Telcos have embraced this. The average 3UK is using 800Mb of data p/ month compared to the UK average of 154 Mb. 3UK understand that by catering to these data users they are attracting and retaining early adopters of new technology and devices. At both home and on the move I just want data, data, data.
The recent launch of EE, the UK’s first 4G provider demonstrated old school Telco thinking. They has the chance to capitalize on their one USP - 4G data speeds, during their short window of 4G exclusivity in the UK. However rather than aggressively win heavy data users from the other 3G only UK operators, they gave away unlimited voice and text whilst capping data usage. Who joins the only 4G network for unlimited voice & text? To me that demonstrates a stunning lack of insight.
Software People go faster.
If you look at the Internet stack you have copper, switching and then the World Web Web – this is the platform where service innovation happens. On top of the WWW you get the creation of the services that customers love – Google, Facebook, YouTube, etc.
If you compare the Internet stack with the Telco stack they look very familiar. Copper, switching, but then fundamentally nothing changed. Telco never built the platform to support and encourage service innovation.
Putting that into historical context humans got by communicating via various methods like cave painting, smoke signals and the written word for nearly 5,000 years. The first significant innovation was the telegraph in 1838. Then 38 years later we got the Telephone. Finally some 100 years later the Mobile Phone arrived in 1984. As you can see – significant amounts of elapsed time between communication technology innovation, and still no creation of a platform to allow service innovation.
Compare those timescales to Software People time.
Using the launch of 3G data as the starting point (2003) within 6 years there were enough software companies innovating to put the Telcos in the position they face today - effectively disrupting their business model.
The Telco DNA always begins from a desire to control.
Remember what the mobile Internet used to look like? The carrier sought to control the content its customers could consume. Only the brands that paid the carrier to appear on the portal made it through. The App Store blew this closed model away with an open playing field and a way for anyone (not just brands) to monetize mobile.
Why the desire for control?
Well the gatekeeper “own” the customer experience, billing relationship and channel. Going back in time that would have been the stagecoach company, the postal service, the telegraph company, the phone company, the mobile company. Today for the majority of people that company is probably Facebook.
Ownership of user identify has always been a big deal for the Telco. The Telco always believed they owned the primary address for everyone on the planet - the phone number.
But where has the innovation been with the customer experience?
Which is more user friendly? Learning a 10 digital number or @jamesparton?
Think how your landline’s primary use is provision of broadband, not phone calls. Who gives out their home phone number anymore?
That shift is now happening on mobile at a much more accelerated rate. I don’t know my own mobile number. I don’t even know my wife’s phone number. I just typed into my address book once.
Marc Andreessen’s paper on software eating the world is a clear inspiration for the Software People theme. If you think back over the first part of the post, you can see why software people have such an advantage over the established Telco players. They have a different DNA. They see the world through a difference lens. The lens of software.
So what’s next?
How will the Telcos avoid their own Kodak moment?
There is no divine right for any company to survive, even those that almost single handedly created a category. The inability to innovate and an obsession with cannibalization stares the Telcos squarely in the eyes.
Some Telcos are launching their own OTT plays - “better we cannibalize ourselves than let someone else do it” seems to be the mantra of the teams responsible for these products, but how long will it be until the corporate anti-bodies attack them?
Telcos don’t know if the Silicon Valley Internet companies are friend or foe, and they can’t seem to play nice with their own kind either – see the failed Wholesale Applications Community debacle.
Due to the growth in transactional volume Telcos are investing in infrastructure like never before, but…they are not seeing a return. The average Telco product development ROI in just 6%. Telco NPD is broken. Water fall processes, bureaucracy, financial models, skill sets - it just doesn’t deliver.
Recognition that Telcos cannot compete with Software People in product development is key to turning the ship around.
The modern path to market has changed. It is no longer about a direct selling relationship with the end customer.
Companies like Twilio are focused on providing the tools to empower Software People to create new experiences and sell them on to their own customers. The world is changing. Software people are the new creators and the new channel to market. APIs are the building blocks they use.
The Telcos need to open up their networks and their mindsets - embrace software people and stop trying to build product.
If your company is not providing APIs for software people to innovate with, how long will you survive?
John Musser the founder of Programmable Web says “in 1995 we were asking, “Do we need a website?”, and by 2000 website was becoming the default. Fast forward to 2010, and we were asking, “Do we need an API?”, and I believe by 2015 APIs will be default for companies, just like websites in 2000”
Only 30% of Telcos have released their own APIs - based on the NPD ROI rate this may not be such a bad thing – but where are the success stories?
Partner to outsource all that hassle has to be the way forward - Telcos already have enough to worry about and this is not core expertise.
This advice to partner rather than build is even more important when you realize that the Telco mindset is not maturing, and many Telco APIs programs are building for failure from the get go.
The power of APIs is the enablement of wider mash-ups. You have to play nice with other communities. An inward focus severely limits your chances of success. However just 28% of Telco exec’s seem to get this.
In addition they also seem to be advocating a strategy of marketing direct to developers which has been proven to fail on multiple occasions.
You need a software people mindset to deliver and run APIs - that is why you have to partner.
A strong indicator that APIs are truly the way for 21st century businesses to interact is the consumerisation trend of APIs for non coders. See IFTTT as an example.
Also there are a number of API orchestration companies making it easier to manage access to your own APIs including reporting, performance management and security.
Telcos must partner to reach the developer community.
History has proven that Telcos cannot effectively engage with software developers directly. The cards are stacked against them – their DNA, business models, complexity, fragmentation, appetite for risk, speed, and instability in management all make it impossible to have the kind of sustained and genuine relationships required to nurture a community.
Telcos should focus on what they excel at - enterprise relationships and partner with companies that understand developers. Its like a battleship trying to hit a speedboat - they are not designed to hit fast moving agile targets.
Software people are your life blood and future channel - you need to figure out a strategy on how to serve them. This is the Twilio model. We provide the tools for software people to build their business - nothing more, nothing less.
I would argue if you provide the right building blocks to software people they will dream up the new use cases and the new revenue streams. Its about partnership and enablement, not control.
To reinforce my point, when we created our communications API at Twilio we had no idea what amazing things people would do with it. We have seen everything from building call centers to helping to diagnose Parkinson’s disease, to making it snow in London.
Making Hackey Sparkle is just one fun example of an experience that would not be possible without Software People dreaming up new ways to use telecommunications - this is how Telcos can close the OTT leak. You just have to give Software People the right tools and the right support.
Thinking back to my days of working in a Telco, I’m not sure how anyone could have created something like Making Hackney Sparkle – the Telco is just not geared up to work on projects like this.
So, some closing thoughts.
- Stop building product
- Partner to provide the right developer tools
- Partner to reach software people that will drive traffic on your networks to counter OTT threat
- Big guns are designed to hit large targets - help software people sell into Enterprise