Understanding Econet as it prepares for the half year results. What does the future look like?

The timing of the Econet Expo taking place this week is interesting.

It’s happening just before Econet Wireless Zimbabwe announces its half year results for 2015. 3 new products we came across were launched at the Expo; Connected Home, the new NFC EcoCash Express Debit Card and a business directory app (technites). These have come hot on the heels of the EcoCash South Africa Remittances, and the LTE re-launch and the retrenchment of the 100, in that order.

Of course not everything is linked to the results, but these products reflect how prepared the company is for a future without a ‘network access monopoly’, so I thought it’d help to discuss them. In fact the results likely don’t look good, but that reflects more on the economy than on Econet itself (or the regulator that they choose to blame).

Doing everything

The Expo event is themed “Going beyond the phone” which is a message of diversifying into more than just connectivity and anything enabled by it whether that’s happening on the mobile phone or not. The company owns Liquid Zimbabwe, Steward Bank, ZOL, EcoCash and is trying as much as possible to provide other daily needs in a typical Zimbabwean’s life with products like the Connected Car, Home, the solar products and other things they are doing in quite a strange way; like online shopping.

The need to diversify makes sense especially when you consider that traditionally they have never had that much input into the “from the ground up” building of what they sell. The company has resold products using its superior subscriber base distribution advantage. Being a technology reseller was a great strategy to get them to the place they are today, but in tomorrow’s internet era this may be a weakness. They will need to be involved in the early stages of concept and design.

Does Econet get the Internet?

But if we go back to Broadband as a product, reselling the data is so far not as profitable as selling voice. First, there’s more competition from everyone that can sell the internet – ISPs, IAPs etc… some 13 or so companies (soon even Facebook could enter the fray), where in the past, they only had to out-compete two companies. More competition means less profit margin.

Econet foresaw the disruption of the internet back in the early 00’s though and bought a data license which became Ecoweb and is now Liquid (and ZOL). Good for them, but they still have another not-voice-business-as-usual problem. In the voice era, expanding the network and getting people to call, directly resulted in lots of calls which translated to lots of revenue and like we said, the limited competition – good profit. In the internet business however, investing money in more network capacity doesn’t directly translate to more profitability.

No mistake, there’s a lot of money to be made from providing the internet, just that the money is not captured at the base station-network level where Econet plays. It is companies like Google, Amazon, Facebook, Apple and WhatsApp (referred to in the telecoms industry as OTT services, short for Over The Top), that are getting that money, through advertising, charging for apps, products, subscriptions and other internet only revenue models. This leaves the operator as a dumb pipe that has to figure out new ways to make money somewhere between the OTTs and the base stations. This didn’t happen overnight but it’s proving hard to solve because of the Reseller vs Builder questions above. Resellers have limited options.

A win-win for the time being

So far the operators’ answer has been to bundle up the internet into bits that can be sold separately. You can buy access to just WhatsApp, or just Facebook, or just this app or that app… To the subscriber, the sliced up internet is cheaper if all they want is access to, say, WhatsApp – and for a lot of new internet users, WhatsApp is all the internet they know so the choice between the regular internet at 15 cents per megabyte, or WhatsApp for $3 a month is easy to make.

The operator is saving precious bandwidth as they only have to optimise for that app for most users. It’s sort of halfway to making some money off the apps. It’s reactionary ofcourse and it’s also on the reseller side of the reseller vs builder model, so it’s got the same holes. It is however working as it solves the significant problem of affordability of the internet, and this problem is not going away anytime soon. It’s predicted that in the year 2020, Africa’s mobile broadband penetration would have increased to just 57%. This gives the operator lots of time to dice up the internet and serve it to subscribers in bits and pieces depending on what you pay, some bits faster than others.

A side benefit for Econet and shareholders is that a bundled up and throttled internet is quite complex for the regulator to touch in terms of pricing. Unless ofcourse the regulator just bans all such bundling and zero rating, which, unfortunately is not the answer as it doesn’t help the subscriber either. Subscribers can’t afford the cost of  the regular internet as it’s priced right now.

Tengai, EcoCshopper, Connected Cars and Homes

The problem for Econet and its shareholders is that even though bundling goes halfway to the apps side, it doesn’t quite get there. At “$6 a piece” it’s as good as it gets, and even then, subscribers are complaining they are being robbed. Bundling also limits itself naturally. It’s hard to sell the same person multiples of the same bundle, or even many different bundles as the more bundles one buys the less it makes sense cost wise?

Bundles don’t come close to the voice and SMS revenues of yesteryear. To come to that level of profitability, they’ll have to get the internet and play/invest at the OTT level. Looking at the Tengai experience (it hasn’t been restored more than 2 months later), a strange EcoShopper product, and the long silence on iPidi you get a sense of how much Econet is prepared for business at this level. No doubt these experiences are teaching them some hard lessons fast, but an elephant the size of Econet, whose muscle memory is to resell, may take long to reprogram. May take too long for the internet.

The elephant’s  muscle memory is to identify and buy base stations & billing systems in China, a broadband bundling system in Canada, a Mobile Financial Solutions platform in India, or a white-label backup solution in the US, to implement a proven business model as fast as money in the bank will allow. Innovation and competition at the internet level means building solutions and continuously improving them as fast as possible by launching new features based on data. Keyword, “building”.

Connected cars and homes are all reseller things. The model is not of the internet.

The EcoCash Success

EcoCash is Econet’s largest future success to date. The product is ubiquitous and has grown from strength to strength since launch, thanks to the company’s aggressive approach to disrupting the financial services sector. Its success has been a success for the economy – especially the creation of jobs. Indeed a certain political party should thank Econet for whatever contribution EcoCash has made to a 2 million jobs promise.

Unfortunately, EcoCash itself operates in a sick economy right now so its true potential as a money maker for shareholders is yet to be realised, and the future being what it is in technology, it’s not as clear as the past.

That EcoCash is operating in a doldrums economy is likely the reason the CEO, Douglas Mboweni, referred to the launch of the EcoCash South Africa money transfer service as “the biggest thing that has happened to EcoCash since it was first launched.” The service helps bring in much needed liquidity into the economy.

Ofcourse it’s just not obvious to who the biggest winner is: The economy? Yes, those micro transfers will help with liquidity; Econet Zimbabwe subscribers & senders? Yes, the diaspora gets to support the relatives back home and that’s a good thing; Econet Zimbabwe shareholders? Yes, more liquidity for EcoCash wallets is a good thing for them.  Econet Wireless South Africa shareholders? They get to charge senders for the transfer and that’s an even greater thing to enjoy. Looks like a win-win-win-win so yes, it’s hard to know which one Mboweni was excited about the most.

EcoCash, network effects and the Internet

But EcoCash has future internet problems too? And regulation ones.

While EcoCash has succeeded through ruthless execution, to a lesser but more important extent it’s network effects that worked in its favour. Network effects means that the more people who use EcoCash, the more value it has for these people. Econet, being fully aware of this, ensured that anyone that needed to transfer money or make payment, used EcoCash. This is why they stopped sending money to other mobile networks – you had to have an Econet sim card to receive.

As mobile money establishes itself in the economy, the regulator will review some things they let Econet do unquestioned in the past. EcoCash will have to inter-operate with other services and the tariffs of the off-net transfers will be reviewed further and this will reduce the network effects of the product. The company will have to differentiate themselves on service quality.

The internet will also erode the physical network advantage Econet has maximised on through controlling USSD access by the competition. As more people start using the internet and internet powered mobile apps become the defacto way to transfer money while banks start to get agent-banking, Econet’s network advantage will reduce as they will be competing against internet only payment companies like PayPal and Android Pay. Econet could power these solutions in the background ofcourse but losing the foreground is a sure way to start losing the background too. Eventually, the internet will hold the wallet, so again, quality of service and branding will matter more.

It’s the regulator’s fault. We’re letting people go.

I found the press release last week announcing the letting go of staff quite interesting.  It seemed motivated to prepare investors/shareholders mentally for two things 1) It’s not our fault, it’s the regulator, and 2) We’re on top of it – i.e. we have started to let people go to fix the problem. I say it was motivated by this because Econet has not been known to volunteer bad news, and yet in this case the company was too keen to share this piece of news with the media. They’d only be keen if they deliberately needed a certain message out. Otherwise, it would leak and they’d let the noise blow over.

I suspect the reason for the continued lobbying of the market against POTRAZ is that things don’t look good for the company and that this is the lowest point ever since dollarisation and people are doing strange things in a panic hoping to deflect the focus or blame. “Ladies and gentleman, we have a crazy and partial regulator, what to do!”

That they have a crazy and partial regulator and government is ofcourse true. How else would you explain the government’s new internet and airtime taxes last year, Telecel getting a special deal to pay just a bit of their license fees at a time, TelOne and NetOne rumoured not to be paying anything in fees etc… It is madness ladies and gentleman. But it’s madness that’s not new in Zimbabwe. Neither the government nor POTRAZ have given reason to be of reason in a very long time. In fact, crazy governments that want to tax the hell out of the internet is a common African existential problem. Surely, Econet would be dishonest to act surprised.

I suspect the other reason Econet is pushing this PR campaign is to delay the inevitable number portability. They may succeed in getting the regulator to give them a break.

The company will have to change itself to operate as an internet company or lose the future to the internet. It already has presence across the continent thanks to sister companies, Liquid and Hai and therefore positioned to understand internet products at regional scale. If they don’t change their DNA and rid themselves of that reseller muscle memory, there’s no shortage of companies global and regional, aiming to capture value at the internet level.