Is it game over for telcos?

Is it game over for telcos?

The Delta Perspective

The death of SMS: What got you here won’t get you there!

The 20th anniversary of SMS saw it outnumbered for the first time by mobile instant messaging (MIM). While SMS averaged 17.6 billion messages per day, MIM messages reached 19.1 billion on average. WhatsApp alone is expected to surpass SMS volumes by April, 2014.


 
This should come as no surprise. SMS has evolved little since first introduced in 1993 while the advancement of technology, mobile devices and the digital ecosystem has made messaging more enriching and engaging. The MIM platforms go beyond plain vanilla texting and achieve far greater user experience and engagement at virtually no cost.
 

A game-changing service: Who’s playing?

The MIM landscape has become increasingly competitive and fragmented over recent years given the multitude of protagonists with varying aims and ambitions. They can be clustered into three groups.


 
1) Entrepreneurs – these start-ups have emerged as the forerunners of a new wave of digital entrepreneurship, seizing the digital opportunity fuelled by the increasing adoption of smart devices. These companies represent the largest installed base of MIM subscribers, with WhatsApp leading the pack with over 450 million active users, processing 53 billion messages daily. Rivals like Viber, WeChat and LINE are not far behind, with over 250 million active users each. These companies are gaining attention of late, with increasing M&A activity on this front, such as Rakuten’s acquisition of Viber for 900 USD million and WhatsApp acquisition by Facebook at an astronomical valuation of 19 USD billion.
 
2) Large digital company launches such as unified Google Hangouts, the newly-multiplatform BlackBerry Messenger for Android and iOS and Facebook’s "Chat Heads" feature in Facebook Home and Messenger underscore the importance of this topic for such companies. Large digital players fight tooth and nail to retain customer ownership and increase subscriber behavioural intelligence. Offering additional services such as MIM or others (email, movie services, music streaming, news, etc.) fulfils both purposes. Not only does it create stickiness and raise the barriers to exit, it also enhances subscriber intelligence in an environment where relevant and comprehensive customer analytics are destined to become the next big monetisation tool (digital/mobile advertising, recommendation engines, etc.)
 
3) Telecom operators have also reacted after witnessing MIM services boom at the expense of their SMS revenues. Ovum predicts that the cannibalisation impact could be more than US$86 billion by 2020. Operators have either ventured independently to address this challenge (e.g. Telefonica’s TU ME, China Mobile’s Jego, etc.) or collaborated through Joyn, the Rich Communication Services (RCS) space but the results are less encouraging especially when the adoption levels are under reported.
 

Are the telecom operators already out?

Amid a high growth, fragmented and hyper-competitive market, the key question is whether telecom operators can still play a relevant role or is it all over? In the past, operators have ignored the threat and relied on regulatory levers to block the usage of these platforms. Today, operators have realised the importance of taking a more active role in the digital ecosystem.
 
Against this backdrop, two strategic alternatives arise:
 
Own the MIM platform:
Mobile players may choose to develop or acquire a proprietary RCS platform to compete with established MIM services. By leveraging their access to customers, operators can push the application through pre-installation and marketing efforts to stimulate uptake among their base. However, telecom operators run a risk of competing with nimble and innovative MIM players that have established scale and will be extremely difficult to break.
 
Mediate with existing players:
Alternatively, as telecom operators sit between consumers and digital players, they are in a sweet spot to seek monetisation opportunities by enhancing the value proposition of third-party MIM services. Core assets such as connectivity, customer intelligence, distribution and billing capabilities can be repackaged as services which are tremendously valuable to MIM players and necessary to their future growth. By joining forces, not only do digital players improve their ability to compete against other digital players, telecom operators also have the opportunity to benefit from the brand, subscriber base and revenue share that MIM players could bring to the partnership. There is no single option that will guarantee success. As operators strive to establish a meaningful role in the new environment, they will need to develop a clear understanding of their market context and truthfully assess their internal capabilities. Both strategic paths have been undertaken by operators in the same market. We see this in China where China Mobile opted for a proprietary MIM platform (Jego), while China Unicom went for a partnership with WeChat.
 
One thing is clear: the time is now. Telcos failing to actively address the MIM challenge not only face the risk of missing out on additional revenue streams and a source of differentiation, but could also lose relevance in their core communications market, driving them inexorably towards the dumb-pipe model.
 
Add to this the new battlefronts opening between other players in the digital ecosystem (e.g. video services, e-commerce, operating systems) and the conclusion can only be that the real party is about to begin and operators are still waiting to be invited.

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Delta Partners - TMD Advisory and Investment