Should South Africa’s mobile operators extend their offerings beyond telecommunications and into a broad range of value-added services such as financial services, media and e-commerce, or should they be low-margin “dumb pipes” over which third-party service providers extract the real profit?
It’s a fundamental question they’re all going to have to answer in the coming years as their revenues and profits come under increasing pressure as their traditional voice businesses erode and as growth in data revenue fails to keep pace amid intense retail price competition.
The issue came to the fore again this week in a discussion I had with Ahmad Farroukh, the newly appointed CEO of MTN in South Africa. Farroukh, who was previously group chief operating officer of the JSE-listed telecoms giant and CEO of its Nigerian business, has been parachuted into the hot seat in South Africa to turn around an operation that has wandered a little off course.
MTN, Farroukh warned, was not prepared to spend billions of dollars building advanced telecoms networks just so that “over the top” providers can get a “free ride” by competing with the company using that same costly infrastructure.
Over-the-top or OTT operators are companies such as Google, Skype and Facebook, which use operators’ infrastructure to provide services to end users.
Farroukh is clearly not enamoured of OTT providers, warning that they offer nothing in return for profiting — “getting a free ride” were his exact words — from mobile operators’ infrastructure. There had to be a quid pro quo, he said.
He “laughed” when rival Cell C announced last week that it had agreed not to charge its customers for data when they use the popular instant messaging service WhatsApp, now owned by Facebook. Cell C CEO Jose Dos Santos said the move was driven in part by a need by mobile operators to embrace rather than fight OTT players. But WhatsApp will soon launch a voice calling feature in its app that will allow consumers to call each other over the Internet for free, bypassing the mobile networks’ own voice services. Is Cell C supping with the devil?
Operators will still make money from the data used to make those WhatsApp calls, but the problem is the margins are significantly lower than they would be if those calls were carried across their own voice networks.
While this change to Internet dialling is unlikely to happen on a large-scale basis overnight, operators like MTN must be wondering whether they are sowing the seeds of their own destruction by building the advanced broadband networks that will make Internet calls, provided by third parties, a reliable and basically free alternative to their own voice infrastructure.
For companies that grew up in a land of milk and honey paid for by voice telephony, it’s probably very difficult to face up to the fact that the voice revenue line that once sustained them so well and for so long could one day dry up entirely. Farroukh thinks it’s going to happen, saying this week that within a few short years, voice calls will effectively be free of charge and that operators will have to make their money elsewhere — from data and, more importantly, from a broad range of digital services, which include mobile financial services and e-commerce. Rival Vodacom has taken a similar approach.
The thinking by large mobile operators in South Africa and worldwide is that expansion into new lines of business, along with cost cutting and ruthless efficiency programmes, are what is needed to ensure they can continue delivering their historically high profit margins to their shareholders.
But that may be expecting too much.
Network operators provide the plumbing on top of which the technology industry functions. They can’t stop the OTT players. If they do, their customers will abandon them. If they work together as an industry to block third-party services, the competition authorities will nail them. They may have to resign themselves to the fact that they are little more than utilities.
And utilities don’t enjoy the sort of profit margins to which this industry has grown accustomed.
- Duncan McLeod is editor of TechCentral. Find him on Twitter
- This column was first published in the Sunday Times