$100b of Revenue is Going Up in Smoke!

A $100b of revenue is a lot of money anyway you look at it. Even for Sen. Everett Dirksen (R-IL) who was once quoted as saying “A billion here, a billion there, and pretty soon you’re talking about real money”, $100b is a lot of money!

In this case we are not talking about “real money” but about electronic pulses (AKA SMS Text Messages) that produced this insane revenue. Later in this post, I will suggest how to get some of it back…

Dean Bubley the telecom analyst, puts these numbers in context:

The telecom industry used to make over $100bn a year from SMS. It still makes a decent fraction of that, although the exact amount depends much on accounting and bundle-allocation chicanery. Excess SMS profits of close to a $trillion over the last decade or two seem probable – with minimal service innovation from reinvested cashflow. To put that in context, it’s probably larger than all banking bonuses worldwide over the same period.

Ever since VoIP and Instant Messaging were introduced 20 years ago, the doomsayers have predicted that the end of tremendous profits for telecom carriers is near. To borrow a phrase from Mark Twain, those reports may have been  premature, but their time has arrived. Looking at the chart below, we may think that SMS usage is in a slow decline, but that is only because the chart tracks the number  of messages, but the truth is that revenue (in this  age of unlimited monthly packages) is in a freefall.

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So that is the SMS story. What about the other cash cow – Voice? Well besides the fact that prices  per minute is on the decline, most markets are already in the “unlimited” world or on the way there. So what is in store for the telecom behemoths? How will they continue to generate billions of revenue for their owners? Some have suggested that the telcos should fight the IM & Application providers (or as many like to call them OTT providers) on their own turf. But how will that generate new revenues? Pure messaging is no longer a stand alone money maker. As Dean Bubley puts it:

That $100bn+ revenue is not coming back from simply sending mobile messages. It might partly come back from adding value to other ecosystems, or enabling particular purposes through A2P (application to person) messaging integrated into business processes, but in terms of straightforward A-to-B transmission of text or pictures, it’s gone. An SMS is not much more valuable, inherently, than an email, and will converge with email in terms of pricing.

So where do we go from here. Obviously the telcos can not sit back while someone else skims off all the fat from their business. Contrary to what we wrote at the beginning of this post, this tremendous amount of money is not going up completely in smoke, rather it is moving to other business models. How do telcos redo their business models to adapt to this new world? In my opinion, it will be very hard for them to do so. Telcos by definition are very stable slow moving ships. For them to chart a new course can take years.

So is the future of Telecom going the way of the Titanic? I would not be so fast to write off Big Telecom.  Their strongest card is something that is very hard to duplicate. Every telco owns millions of customers. They have a long relationship with them and are experienced in how to maximize revenue from their  customer base.

Unlike the biggies, most small innovative companies in the telecom space,  have great products but are lacking in easy access to customers. Seems to me that this may be a match made in heaven. Just imagine what these aggressive telecom startups could do if that had access to the gigantic customer base that each telco controls. Developing such a relationship is tricky and in order to succeed the core business groups at the telco will have to keep their hands off the innovators.

How should it be done? The telcos need to act like a good pedagogue and provide only support and resources (money, connections and knowledge) on request. Give the startups the freedom and mandate to break rules and protocol. No efforts should made  at first to integrate the newcomers in to the existing infrastructure or organisation. Such  efforts are destined for failure.

I would like to see telcos put  every year between 0.5% to 1% of their revenue into in-house accelerators. Do have some kind of selection process, but otherwise just give them freedom to develop crazy things. You can be sure that any dollar invested there will bring a 10x return compared to traditional R&D. Some telcos such as Telenor (good post here by Chris), Telefonica,Deutsche Telekom/T-Mobile and Singtel are already active in this direction, but if the industry wants to not only survive, but grow, this method should become the standard.