Telecom: the business backbone

I heard that voice calls will eventually cost zero, nil, nada. And yet the action and the backroom games continue unabated. What pot of gold do they see that misses the eye of the average man on the streets who is wooed by 0.5 paisa to a second plans? Or is this just mass suicide?

Let us look at the business of software. At a broad level, there are four types of software companies:

1.Product companies (say MS-Office, AutoCAD) - the largest part of their revenues comes from license and upgrades sales.
2.Service companies (an Infosys, Mphasis) - bulk of their revenues come from services like development, support, on-site services, training, implementation etc.
3.Hybrid companies (an SAP, Baan) — substantial revenues from both licenses and services.
4.Platform companies (Windows 7, Amazon EC2) — these products and offerings are platforms offering no 'real' functionality. Product and service companies make available their offerings on the platform.

Platforms

Let us focus on platform companies, and let us take Windows as an example. Windows offers the capability to interact with hardware, provides a UI, storage, networking and a host of other services and capabilities. Ignoring the set of free applications (which are truly not part of the Windows platform), you can do nothing of value with it.

Conversely, look at a software product. Without the tons of capabilities that the millions of lines of code that the operating system provides, it is practically impossible for the value of the application to reach the hands of the user.

Look at this 'synergy' from the platform providers viewpoint: not only must he provide more and more services and innovation, the overall quality, usability and spread must keep increasing — and at lower costs. Consider Windows itself. In real purchasing power terms, the latest OS is a small fraction of what one paid for Windows 3.1 decades ago. Microsoft more than makes up for this with the number of licenses they now sell.

What has this got to do with telecom? Everything!

The Road Travelled Thus Far

Consciously or otherwise, see what they have accomplished so far:

Most people with money to spend now have a mobile connection
Corporates and other 'richer' folks typically are on post-paid connections
There is a credit limit they enjoy
A bill reaches them every month, which is often paid by check, on-line or ECS
Substantial users now have a broadband connection from a mobile provider (Tata, Airtel and others)

What does this mean from a 'platform' angle?

The Rainbow

Reach, reach & reach (the equivalent of location, location & location of the retail chain).

Today, companies like Airtel are already selling anti-virus subscriptions and business solutions in addition to applications on a SaaS platform (Nivio). I see these initiatives more as 'testing the waters'.

Entertainment and personal preferences are big money. Ring tones, MP3s, wallpapers, cricket scores and more rake in hundreds of crores. This is not about the money — but about the capability to deliver and charge a user for services. Business services like stock alerts are mushrooming daily and millions are subscribing to these — largely due to the ease of buying and paying for them.

As someone who is working closely with many hosted application providers across the broad CRM spectrum, the width of offerings to businesses and their customers is truly astounding. Even more astounding is that most of these great offerings come from 'garage' operators who leverage the computing platforms on the cloud and the mobile platform.

The mobile wallet, where your mobile becomes a mode of payment, is becoming a reality. Money transfers (limited for now) are now allowed. As we speak, RBI has strong regulations in place that require all money to flow from/to a bank account. This prevents a mobile service provider to actually 'touch' the money.

Show Me the Money

The last example represents the real goldmine! Consider Visa. In a credit card transaction, there is the issuer bank (customers bank) and merchant bank (sellers bank). Money flow and risks belong to these banks, while Visa gets a percentage of all moneys authorised via its platform! Today, while the telecom companies provide an increasing share of the communication channels for money transfer, they make no real money for these services.

What if telecom companies are allowed to function like a bank and the mobile number becomes a virtual credit card? Every single person with a mobile phone gets plugged into the word of plastic money.

Think of the use cases. You can transfer money to your wife's phone instantly. She can pay to a shop keeper who does not need to invest in an expensive credit card EDC terminal. You can utilise a credit limit allowed by your mobile provider (just as in a credit card) and you get the statement along with your mobile bill!

What gets created is a “web of money” and mobility for money. Millions of businesses will jump onto this platform — for the sheer simplicity, usability and the financial services that will be available.

And the Difference is?

Unlike an operating system, routing money comes with great financial benefits:

A 'small' transfer fee per transaction
The equivalent of the 2.5% credit card commission
Payment collection service charges (in case money is collected via the monthly mobile bill or from the pre-paid balance)
Huge spend data for data mining and targeted advertising/promotions
Location based services (since you are always 'tracked' while carrying a mobile)
A sales platform, with regular sales profits — the mobile operator is the vendor as well

The above represent thousands of crores in profits. And the icing on the cake is the 'float money' — your money on this platform will either earn zero or savings bank rate of interest. Mobile operators, on the other hand will park the float at high rates of interest with banks and the differential can go as high as 6%. Now THAT is something!

And the Losers Are?

For the user, it hardly matters. Savings bank interest has never excited anyone to keep money in the bank. What is more important is that cash be available when needed — and the mobile platform delivers this availability in orders of magnitude larger than banks & their ATM network. If savings rate of interest if offered, than one can expect the bulk of saving bank float to move to the mobile platform.

The hardest hit will be the banks of today. Substantial interest leverage is available due to the low cost of CASA funds (Current And Savings Accounts). Which is (one of ) the reasons why the group of bankers 'represented' by the RBI, refusing to budge in permitting mobile operators to offer true money services.

Walt Disney is in the Business of?

At a time when the railways were at their peak in North America, the airlines & roads were coming of age. The railways, believing that they were in the railroad business, did everything to stay in that business and yet lost out. They forgot — they were not in the business of running trains, they were in the transportation space.

Did you know that Walt Disney is in the business of 'happiness' — and not in the business of cartoons or theme parks? Or that McDonald is in the business of Real Estate and not burgers?

As luck would have it, private mobile players recognized quickly that they are not in the business of voice and SMS, but in the business of connecting people. State run BSNL & MTNL are too far behind not to catch up — and like the railroads are resorting to 'selling' their services as Address ID proofs and cheaper STD calls.

When will banks realize that everything changes and a collaborative stand with telecom will deliver a great win-win for all?

Drops of Water

The writing is on the wall. From mChek, semi-closed mobile wallets & smart phones (for browser based net banking) have added exciting dimensions to this space.

Business applications providers have aggressive plans on providing users an integrated experience with the mobile payment platforms.

It's only time before the powers that control licenses are convinced of the explosive growth that mobile commerce will bring to the nation, including greater tax compliance and inclusive growth.

By

Sunil Gupta, AVP, Tally Solutions Pvt. Ltd