Navigating telecoms challenges — of crocodiles, and snakes and ladders, without the snakes

8 Sep 2024

This is an extract from Life Lessons: How to Fail and Win by author and entrepreneur Alan Knott-Craig.

After a lifetime of dinner-table conversations with my dad, I assumed I knew how to make money in telecoms. Get a licence. Build a network.

Build a brand and distribution channel. And wait for the money to roll in. I did all of that. And the money did indeed roll in. The trouble was that there was more money rolling out than rolling in. We simply couldn’t make a profit.

We made plenty of operational mistakes (hired some B-players, wrong billing systems, too many staff), but the fundamental problem was not execution. The problem was strategy: we had the wrong one.

I thought both telecoms categories – voice and data – were the same. I was wrong. Businesses built on voice revenues (i.e. traditional mobile operators) have a much higher profit margin than businesses built on data revenues.

Why is that?

Back in the ’90s everyone underestimated the demand for cellphones.

So when the Vodacoms and MTNs of the world were starting up, they set their retail prices very high so that they could be sure to make a profit. For example, Vodacom forecast that it would have 50,000 customers after five years. In order to make a profit, it calculated that it needed to charge R1.80 per minute.

Vodacom reached 50,000 customers after six months. That’s 20 times faster than it forecast. But Vodacom didn’t lower its retail rate of R1.80 per minute, which meant it was 20 times more profitable than originally planned. This was why Vodacom and MTN became the biggest brands and among the biggest companies in South Africa and Africa. They were fuelled by hyper-profits.

Voice is hyper-profitable. Data (internet access) only came along a decade later. That’s what iBurst was selling. Data. Buy a router from us, pay R700 per month, and connect to the World Wide Web at 5Mbps.

We rolled out iBurst’s network from 2006 to 2009. We spent hundreds of millions of rands building base stations, transmission networks and data centres. And then we spent hundreds of millions of rands every year paying salaries, rent, and maintaining our network. The trouble was we weren’t selling voice at R1.80 per minute. We were selling data at R700 per month.

The economics of voice and data

Here’s a comparison to give you an idea of the economic difference between voice and data.

At iBurst, we gave you unlimited data for R700 per month. That includes unlimited voice (VOIP) calls. All for R700 per month. Now equate that to Vodacom. If you were to spend 120 minutes (two hours) daily on your Vodacom cellphone and not use your mobile data at all (no email, WhatsApp, SMS, YouTube, Facebook), your bill would be R6 480 pm, assuming out-of-bundle rates.

R700 vs R6 480.

That’s nine times more revenue for the same capex and operational spend. Non-profit vs hyper-profit, which is why iBurst was always chasing its tail. Just as we’d get our noses ahead, there’d be another price war or technology change. And we’d fall back. Wireless broadband is like a game of snakes and ladders, without the ladders. And yet Vodacom and MTN make a lot of money selling data. How is that possible?

They have a massive ‘installed base’ of voice customers that provide them with creamy voice profit margins. That same base allows them to immediately monetise data infrastructure, speeding up pay-back.

For example, Vodacom already has 30 million customers. So, when it upgrades its 15 000 base stations to 5G, that infrastructure immediately starts generating revenue.

Compare that to a pure 5G network being built from scratch. First, no creamy voice hyper-profit margins. Second, you must spend years building a network and customer base before you can produce comparable revenues to the likes of Vodacom, which achieves revenue scale on day one.

This brings me to the true strategic crux of broadband: traditional stand-alone wireless data networks are not profitable.

Let’s assume you somehow have the cash and the courage to build a national 5G network from scratch, and then you spend tens of millions building a brand and acquiring customers. It will take you at least five years to reach profitability, and just as you get your nose in front, BOOM!

6G arrives. Faster data.

Who wants 5G when they can have 6G? No one. So, you’re forced to rip out and replace your entire 5G network with 6G. Now you’ve doubled your input costs, but you can’t double your retail price because the consumer expects to pay less money for more speed every year. Believe me, that maths doesn’t look good on an Excel spreadsheet.

But you miraculously pull it off. You somehow replace 5G with 6G and keep your retail prices low enough to attract customers, and after five years, you get your nose in front again.

BOOM!

7G arrives.

The wireless data business is snakes and ladders, without the ladders.

The incumbents like Vodacom and MTN are trundling along, sweating their 5G, 6G and 7G network upgrades with their installed customer base while frantically trying to massage the inescapable truth that their voice hyper-profit margins are a thing of the past.

A throwback to prehistoric times. Like dinosaurs.

Voice hyper-profit margins are the telecoms equivalent of dinosaurs.

There are no more dinosaurs. Other than birds, the crocodile is the closest living relative to dinosaurs. It somehow survived the climatic cataclysm that wiped out T-Rexes, brontosauruses, stegosauruses and pterodactyls. That’s what today’s mobile voice is – a crocodile.

Modern-day telecoms is about data, and data has a different profit margin to voice. A low profit margin.

That was why I swore never to start or run a wireless broadband telco ever again. I don’t like snakes and ladders without the ladders.

I only like snakes and ladders without the snakes. But I didn’t know all of this back in 2008. I was financially incentivised to believe a lie: wireless broadband is profitable.

And it was fun. The company culture was great, and we were helping people get on the internet. I had a big job that fed my ego. That’s when my first daughter arrived, and suddenly my home life became complicated. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

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The economics of voice and data