Voice: Breaking free from the telecom business models

It’s very clear that software companies took the lead in innovation around voice communications. The telecom industry is lost in the woods arguing about standards, technology and regulation, while Facebook, WhatsApp, Google, WeChat and numerous startups are focused on new use cases and business model innovation.

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Telco is lost in the woods (again)

Telephony is considered a declining business, despite globally increasing dependence on communications. [tweetable]People are not communicating less – they just attribute less and less value to telephony[/tweetable]. Today, many everyday communication needs are better served by alternatives that don’t fall within the narrow definition of telephony.

We wrote about freeing voice from telephony almost 3 years ago in our Telco Innovation Toolbox. Today I’m excited to see the future of voice unfolding in full force in front of our eyes.

Facebook wants to take over the dialer

Did you notice how Facebook has become increasingly bold in everything related to voice and video services? Messenger’s 600 Million users can call each other using voice and video without leaving the app. Facebook-owned Whatsapp also allows its 800 Million users to speak with each other within the app. The huge scale of Facebook voice services surpasses any telco. Compare that with China Mobile, the number one telecom operator in the word, which had 808 Million subscribers as of January 2015.

Facebook understands that [tweetable]voice is central to human communication and will always remain so[/tweetable]. Therefore the company wants to make sure that people will speak with each other inside the walled gardens of the company’s social networks. Facebook doesn’t look at voice as a revenue source. Voice is a universal need and therefore it is an effective way to attract and engage users. David Marcus, who left the position of PayPal President to run Facebook Messenger, says:

“VOIP is just one way that the company hopes to use the messaging app as a platform for much bigger things, including online payments.”

Google Fi wants to take over the core network

Google trails behind still trying to break through with its Hangout platform. The recently announced Google Fi service is a shot in the direction of reinventing voice and video communications.

So far, most media and blogosphere attention is focused on Google Fi pricing and network switching technology. I believe that these are the least interesting aspects of the Google’s initiative. It’s pretty clear that Google has bigger plans in mind. Google Fi unbundles voice service from the telecom network turning Project Fi into a platform for innovation in communication services. Nick Fox, Google VP of Communications Products writes on the company blog:

“As mobile devices continually improve how you connect to people and information, it’s important that wireless connectivity and communication keep pace and be fast everywhere, easy to use, and accessible to everyone. That’s why today we’re introducing Project Fi, a program to explore this opportunity by introducing new ideas through a fast and easy wireless experience.”

Today Google uses pricing and network switching technology to attract an initial user base and seed Project Fi for the next stage. The next stage will be opening the platform to Google’s huge base of mobile and backend developers, together with an ever-growing number of Android handset makers. This is when Google Fi will become truly interesting allowing Google to “pull an Android” on the core business of telecom operators and create a credible competition to Facebook’s communication services.

Much like Facebook, Google is going into telecom not for wireless plan revenues, but to compete asymmetrically, transferring profits from the telecom industry to its core online ad business.

Twilio wants to take over the telecom API

Twilio has proven that developers have a genuine interest in telecommunication services. The company offers an API platform for programmatic access to voice telephony, SMS and now instant messaging. The company reports that 700,000 developers have already registered to use its platform.

Contrary to the many failed telco attempts at driving revenue with APIs, Twilio proves that telecom developers and APIs can be a good business too. The company is worth over $1 Billion. Twilio chief executive Jeff Lawson says the company hit an annual run rate of $100 million in revenue in 2014, and is adding $1 million in annualized revenue every seven days.

The company actively nurtures its main asset – the ecosystem of developers. Twilio teamed up with three well-known venture capital investors, Bessemer Venture Partners, DFJ and Redpoint Ventures to create a $50 Million investment fund to invest in companies using the Twilio API.

Twilio flourishes where telco failed: creating an attractive business by building a developer ecosystem on top of commodity telecom services. Developers can reinvent point-to-point telephony into thousands of use cases that telcos were unable to realise.

Microsoft wants to take over business services

Microsoft is about to join the fray as well. The first move was replacing Lync with Skype, a still hugely popular VoIP service, as a core of its suite of business communication services. For Microsoft, voice is a way to boost Office – its well-entrenched suite of business tools.

Exciting times ahead

Telephony may be in terminal decline, as most analysts agree. Voice and video will however remain a central part of human communication. These are very exciting times in telecoms for those who understand that [tweetable]”digital” is not a channel, but a new set of business models[/tweetable]. Software companies that use these new business models will use voice communication asymmetrically transferring profits from legacy telephony to their non-telecom business.

The surprising business model of OTT2 messaging apps

[In the first part of this two-part blog post, we introduced a second tidal wave of mobile ecosystems (after Android/iOS), mobile-first and twice over-the-top (OTT²): messaging apps. OTT² ecosystems drive engagement by commoditizing hardware, apps and services. In part 2, Stijn Schuermans explores the unexpected way in which the engagement from messaging apps is monetized. (Hint: it’s not advertising.)]

04 OTT2 messaging apps

In the first part of this two-part blog post, I introduced a second tidal wave of mobile ecosystems (after Android/iOS), mobile-first and twice over-the-top (OTT²): messaging apps. Messaging apps are proving to be so much more powerful than just chat. While most apps are just value-adds for iOS and Android, messaging apps are the first that can create a substantially new mobile landscape. They are important not just because of their market momentum of 100s of millions of users, but because they build on asymmetric business models, the same economics that brought Apple and Android to their dominance.

By definition, a company with an asymmetric business model creates (and sometimes destroys) value in one vertical, in order to capture value in its core market. For example, Google commoditized handsets by providing the Android OS for free in order to defend its advertising business. So what is the core business of messaging apps that is being boosted?

The surprising core business of second-wave mobile ecosystems

[tweetable]The dominant business model for OTT² messaging apps is – perhaps unexpectedly – not advertising, but m-commerce[/tweetable].

With messaging apps, the business model focus shifts from selling the app (up-front or using in-app payments) or selling the audience (via ads) to selling goods through the app. The business model entails the promotion and sale of virtual goods (stickers, mobile games, apps), physical goods and services (like taxi rides, as explained in part 1 of this post). Mark Watts-Jones offers this handy overview of how messaging apps make money:

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Let’s take a closer look at some examples.

  • WeChat’s revenue About 85% of the $1.1B that Tencent’s WeChat app will earn this year will come from online gaming, estimates The Economist. The rest will come from stickers, services like sponsored accounts, and the fast-growing area of m-commerce. Already merchants are selling goods via WeChat as diverse as fruits, smartphones (150K Xiaomi phone in 10 minutes), movie tickets, taxi rides and insurance against malignant tumors. You can pay at vending machines with the app. Entire books have been written about how to do marketing on WeChat.
  • Line’s revenue Games accounted for 60% of the $338M that Line made in 2013. Another 20% comes from sticker purchases and the rest from business services like official accounts and branded stickers. Line has been actively testing the e-commerce waters with flash sales, hot deals and the Line Mall marketplace.
  • Messaging and e-commerce in investments Investment activity gives another view on how crucial m-commerce is as a revenue model for messaging. Viber was acquired by Japan’s e-commerce champion Rakuten. Alibaba, China’s king of online sales, invested $215M in Tango. In the other direction, Tencent has invested in JD.com, another large Chinese e-commerce player.

Also somewhat surprisingly, the innovations in this business models don’t come from US entrepreneurial hotspots like Silicon Valley or Boston. It is Asian companies that lead the way. The subscription model of WhatsApp (prior to its acquisition, at least) is the exception, not the rule.

The dominance of m-commerce makes sense

While advertising is certainly a popular and straightforward choice when monetizing user attention, the prevalence of m-commerce in messaging apps should actually come as no surprise.

First, consumers are increasingly comfortable with buying on their mobile devices. Mobile now accounts for a quarter of e-commerce traffic, a fast-growing category by itself. On the web, e-commerce is a trillion-dollar industry, an order of magnitude larger than advertising (which broke the $100B barrier in 2012) and dwarfing other revenue models like gaming, gambling, SaaS or media streaming. We can expect the same to happen in mobile. In fact, many retailers see a substantial amount of their online audience coming from mobile devices.

Counterintuitively, this growth of mobile retail might accelerate as more people in emerging economies come online. Connie Chan from Andreessen Horowitz says that in third and fourth-tier cities in China, for example, traditional brick-and-mortar retail infrastructure like shopping malls might not exist, leaving m-commerce as the more convenient option.

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For app developers, m-commerce is a good choice, too. e-Commerce and affiliate programs are among the highest-grossing revenue models for mobile developers, dwarfing the median revenues that developers can expect from ads or even in-app purchases.

It’s no wonder then to see significant investments in mobile commerce. David Marcus, Paypal’s CEO since 2 years, has made mobile a strategic priority for the company and (as a former founder of mobile payment company Zong) has in fact been selected by eBay’s executives to do exactly that. Tencent, being of the protagonists of this story as the company behind WeChat, has recently made investments worth hundreds of millions of dollars in e-commerce companies like JD.com, Dianping (often referred to as China’s Yelp) and E-house (real-estate). m-Commerce has been hailed as the next big thing for many years – these investments indicate that things are finally starting to move in a significant way.

Developers are catching on

The m-commerce megatrend, especially in OTT² ecosystems, has not escaped the attention of mobile developers.

[tweetable]Messaging ecosystems are fast becoming a major channel for the discovery and promotion of apps[/tweetable], a long-standing pain point in iOS and even more so Android. Look at the recent move by Tencent to enable app downloads from WeChat. It capitalizes on the trust inherent to social referrals (in earlier editions of Developer Economics, Facebook was highlighted as a main app promotion channels for the same reason). It might also tip the balance to Tencent’s own app store in a country where Google Play is mostly absent and a plethora of app stores compete for attention.

The high earnings potential of m-commerce for developers is also translating in fast-growing adoption. In our Developer Economics research, we found that e-commerce sales grew significantly in popularity as a revenue model from 5% in Q3 2013 to 8% in Q1 2014. The role of app makers is changing from Developer-as-a-Programmer to Developer-as-a-Salesperson.

The mobile success recipe

In summary, a clear recipe is emerging for the next giant tech companies in the age of mobile. First, use ecosystem economics to create value for your users, and don’t be afraid to subsidize or undercut adjacent market arenas if that helps to boost traction. The network effects in your ecosystem will help to solidify your competitive position and make it difficult for others to attack you, including the carriers and operating systems on which your platform is built. Next, use the highest-earning revenue model on both the web an in mobile to monetize: e-commerce. Any app that succeeds in doing this, messaging or not, will have a bright future ahead.

OTT2: the second tidal wave of mobile ecosystems

[The mobile space is about to be shaken up again. Get ready for the second tidal wave of mobile ecosystems to reshuffle the market. These powerful new ecosystems are mobile-first and twice over-the-top (OTT²): they are built on top of telco services and on top of app platforms.]

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It’s 2014. We’re 6 years into the smartphone revolution, and the mobile space is starting to settle down. iOS and Android are clearly in the lead among app platforms – their ecosystem strategy has created a natural duopoly in which competing platforms no longer stand a chance. Smartphone innovation is no longer radical, but mostly incremental. There are signs that smartphone users are becoming overserved by the latest and greatest flagship devices: smartphones are becoming “good enough” as such and undifferentiated for mainstream users.

But things are about to be shaken up again. [tweetable]A second tidal wave of mobile ecosystems is gaining strength, ready to thoroughly reshuffle the mobile market once more[/tweetable].

These powerful new ecosystems are mobile-first and twice over-the-top (OTT²): they are built on top of telco services and on top of app platforms. I’m talking about messaging apps of course: WhatsApp, Line, WeChat/Weixin, Viber, Telegram, KakaoTalk, Kik.

Gaining momentum

[tweetable]Messaging apps are proving to be so much more powerful than just chat[/tweetable]. Even well established social networks and ecommerce giants are getting nervous enough to make high-value surprise acquisitions (we’ll talk about Facebook in a moment).

The first indicator of their momentum is the sheer size of their user bases. Tango, considered to be a smaller player, has 200M registered users and 70M monthly active users (MAU). Wechat has passed 350M MAU, WhatsApp has over 450M MAU. Chat apps don’t just get downloaded often, but they are incredibly engaging. A large share of engagement minutes is going to staying connected with friends, family and business partners, and chat apps are increasingly the way to do so. Chat messages overtook SMS in global message volume in April 2013. In essence, the rise of messaging apps relegated telcos as a group to the status of just another communication ecosystem.

Investors agree when it comes to their value, if we can believe the recent M&A, IPO and investment activity.

  • WhatsApp was acquired by Facebook for $19B
  • Viber was acquired by Japanese e-commerce player Rakuten for $900M in cash
  • Tango received a $280M series D investment, including $215M from China’s e-commerce king Alibaba
  • Line is rumoured to prepare for a $28B IPO
  • KakaoTalk is also preparing for an IPO, aiming at a $2B valuation

OTT2 graph

Unfair advantage

[tweetable]Messaging apps are important because they build on asymmetric business models, the same economics that brought Apple and Android to their dominance[/tweetable]. They are subsidizing or commoditizing hardware, apps and services to grab users and boost their core business. The first examples of this are already evident.

  • Messaging apps are of course commoditizing the quintessential telco services: voice and texting. Whatsapp announced a VoIP play. Even large operators in emerging markets with incomplete mobile penetration like China Mobile are reporting financial performance challenges, citing competition from chat apps as the reason.
  • Tencent (known from the wildly popular instant messenger QQ and chat app WeChat) and Alibaba (China’s e-commerce champion) are fighting their battle for user acquisition and engagement in the most unexpected of places: taxis. Not only have Tencent and Alibaba both invested in taxi hailing apps (DiDi and Kuaidi respectively), they are both actively subsidizing taxi rides by giving discounts if users use their apps. The mini price war is so intense that in some cases, users actually get paid when taking a taxi.
  • Apps like Line and Tango are taking a page from iOS and Android’s playbook, using game developers and content providers to add value to their platforms.

With this “user landgrab” and high engagement, messaging apps are competing with the telco services and app platforms on which they are built, who are trying to achieve the same reach and share of attention. [tweetable]While most apps are just value-adds for iOS and Android, messaging apps are the first that can create a substantially new mobile landscape[/tweetable].

So what is the core business of chat apps that is being boosted? We’ll discuss the surprising dominant revenue model of social apps in part 2 of this post. Stay tuned!

— Stijn

Facebook buys back over 100B monthly engagement minutes it lost to Whatsapp

[tweetable]Facebook will live or die by user engagement, especially on mobile[/tweetable]. Whatsapp sends 18 billion and receives 36 billion messages a day. Let’s say it takes about 7 seconds to send a message and 3 seconds to read a message. This is based on watching how my teenage kids use Whatsapp texting and sending pictures. The math is simple:

((18B messages * 7sec + 36B messages * 3sec) / 60) * 30 = 117B minutes per month

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People have limited time and attention. So most of these 110+ Billion minutes were taken from the potential Facebook mobile engagement minutes. Wow! That is the cost of doing nothing for Facebook.

There is more

Whatsapp is growing at about 1M users a day. That means Facebook looses at least an additional 12.4 Million engagement minutes each and every day. For simplicity I take into account only Whatsapp users that are active daily, which are 70% of 450M monthly active users:

3.9B minutes per day / 315M daily active users = 12.4 minutes per day per user

Now what?

The Whatsapp blog says:

“Here’s what will change for you, our users: nothing.

The company remains independent and loyal to its promise of “No ads!”. There will be no immediate monetisation opportunities for Facebook. What can be there for Facebook beyond averting future disaster of Whatsapp killing Facebook mobile engagement? Or even worth, falling into Google’s hostile hands?

Mark Zuckerberg writes about the acquisition:

Our mission is to make the world more open and connected. We do this by building services that help people share any type of content with any group of people they want. WhatsApp will help us do this by continuing to develop a service that people around the world love to use every day.

Will we see 450M mobile numbers brought in by Whatsapp coming into play helping Facebook connect people? Time will tell, but the potential is there for Facebook to become huge integrated communication provider on par with China Mobile, the world’s largest mobile operator.

(China Mobile has 700M subscribers but, given that many people have two phones, the number of users is much lower and close to 450M of Whatsapp monthly active users.)

– Michael

(This article was originally published on Michael’s personal blog – here)