HomeBusiness DigestThe Human Capital Telescope: Internet-based phones vs telecoms

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Given that core revenue streams of Zimbabwe’s telecoms companies flow from services which can be availed almost for free on the internet, mobile voice-over-internet protocol (VoIP) and complimentary internet-dependent messaging pose a direct threat to these companies’ very survival. VoIP is a technology that allows voice-based communications to be routed entirely via the internet, by-passing the voice-transmission infrastructure of regular non-internet phone networks.

 

In the not-so-distant future we might witness power changing hands in the telecoms industry from regular mobile networks to internet service providers (ISPs). ISPs that will innovate to provide affordable always-on mobile internet, providing good-enough internet bandwidth (internet speed) to enable voice and text messaging, will be crowned the champions of telecoms. 

Mobile internet threat real

Already, some sections of locally-based Zimbabweans, especially the internet-savvy youths who have access to internet-enabled mobile phones, are beginning to embrace complimentary instant messaging services such as WhatsApp, Mixit and Nimbuzz. Canadian-based Research In Motion, manufacturers of the Blackberry phone, have clearly demonstrated the commercial power of driving their sales by turning text messaging into a complimentary service through their BlackBerry Messenger, a software application that allows users of Blackberry handsets to send free text messages to each other via always-on internet platforms. Major phone brands are beginning to carry instant messaging and VoIP capabilities.

That VoIP and internet-based text messaging capabilities could be extended to entry level mobile phones is not a far-off dream.  It is this spectre of extending mobility to internet services to the low-end telecoms market segments that is enabling internet-dependent communication to disrupt telecommunications incumbents such as Telecel, Netone, Telone and Econet.

From the incumbents’ perspective, the estimated impact of internet-based communication technology might be perceived as a minor threat to their current and future earnings.  Such a strategic response could be suicidal.

Death by profit-pursuit

To suggest that telecoms incumbents could be destroyed by the pursuit of profit is counter-intuitive. Sadly, this business truth is not taught in many a business school. This might even be intellectually unnerving to many financial analysts and business pundits. 

 

A phenomenon called disruption illuminates this counter intuition. Almost every blue-chip company  that either upset or decimated an incumbent leveraged on disruption. Disruption occurs when a start-up firm introduces a low-priced poorly performing offering either to the worst customers of the incumbents or by offering these to an entirely new market strategically created by courting non-consumers once denied access as a result of financial and technical barriers.

 

Facing a disruptive attack on their ‘worst market’ segment, incumbents strategically retreat, arguing that  low margins in the low-end are not worth fighting for as that would amount to fighting for bread crumbs.

 

In fact, by withdrawing from the low end, overall margins for the incumbents rise and so are other metrics such as Return on Net Assets (Rona). Naïve investors are hoodwinked by a technicality that manipulates the denominator— Rona  increases simply because the incumbent is now using less assets while revenues remain stagnant. 

 

With time the newcomers find ways of improving their initial, poorly-performing products but maintain affordability and attack the next level of the incumbent’s market. The disruptor repeats the process until they completely push the incumbent out of the market. Disruption’s march upmarket is akin to a rebel army capturing a country, village by village, town by town, city by city and finally seizing the capital.  

Such a process might occur in Zimbabwe’s telecoms sector. Telecoms incumbents thriving on premium pricing models might find it culturally repulsive to adopt a low-balling business model.

Two issues could be hired as an argument against adopting mobile VoIP. First, an argument centred on the quality of VoIP could be advanced, reasoning that the current voice delivery technologies offer superior quality in terms of voice clarity, speed, smooth conversations and convenience. Incumbents who fear ‘soiling’ the brands they have built over time might view adopting a technology fraught with quality issues a non-starter.

 

Indeed, when bandwidths (internet speeds) are low, the quality of VoIP calls is poor, ranging from chopped conversations to delayed voice transmission. Second, an economic argument could be advanced, positing correctly that the profit margins are likely to be significantly lower than those yielded by established offerings. For enterprises sold to the profit-maximisation dogma, these are perfectly rational but potentially fatal strategic responses.

The irony is that poor initial quality and low pricing are the very enablers of disruptive attacks that have decimated unwary incumbents who do not understand how disruptive forces work.

In this case, the emerging disruptive mobile internet’s instant communication technology is mostly likely to disrupt through the non-consumption gateway, the same way mobile phones disrupted  landlines. Thousands of potential Zimbabwean users of VoIP are not consuming VoIP owing to barriers to access. Not owning either a Personal Computer (PC) or a smartphone is the most influential driver of VoIP non-consumption in Zimbabwe.

Strategic mindset change

To strategically deal with disruption, telecoms incumbents need to consider at least three things.

First, telecoms incumbents should understand that no business is immune from disruption. A former Israeli politician, once remarked that the US could conquer the world using three Generals — General Electric (GE), General Foods (GF) and General Motors (GM). GF is no more. GM was disrupted by the Japanese automobile triplets—Toyota, Nissan and Honda — who launched disruptive attacks through low-priced ‘inferior’ models aimed at the low-end of GM’s market. Similarly, TM Supermarkets were driven to a near-death experience by retail disruptors pushing low-priced ‘inferior’ quality products.

Second, incumbents need to understand that disruptive forces in Zimbabwe tend to act much quicker than elsewhere because we have become a society with essentially two segments — the poor and rich — meaning the climb up-market by disruptive attacks are also relatively quicker.

Third, disruptive forces have been known to chip away at the incumbents’ core business slowly and imperceptibly. It has been noted that the mainframe computer and its disruptor, the minicomputer, grew side by side for 20 years before the mainframe became a technological dinosaur. It took lesser time for the minicomputer to be disrupted into extinction by the PC. Already, in Zimbabwe, VoIP phones with restricted mobility are gaining traction, bringing fixed telephones even closer to the brink of extinction.

Auditors may certify you a going concern, but in essence you will be a going-down concern.

 

Let’s discuss at brettchulu@consultant.com.

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