Microsoft-Yahoo: What does it mean for telcos?
There's been no shortage of analysis of what Microsoft's proposed takeover of Yahoo means for the participants themselves or the technology industry at large. Indeed, the markets are speaking and suggest deep misgivings about the whole venture. Nonetheless, what's been lacking so far is deep analysis of what the deal could mean for telcos.
The questions are intriguingly simple, even if the answers are not:
- Are they in our business, and are we in theirs? In what ways are Microsoft and Yahoo in competition with telcos, and vice-versa?
- Does a consolidation among portal/IM partners have a strategic impact?
- Are there new opportunities to collaborate and gain mutual benefit from the combined forces?
To end the suspense, our overall conclusion is that the deal has little impact, either as a threat or opportunity. The reasons, however, may not always be the ones you expect.
Microsoft-Yahoo: a potential competitor, or customer?
Many fixed and mobile operators have deals with Microsoft and Yahoo for consumer portals, and VoIP and IM clients. In principle these rival services can threaten operator revenue streams for voice, messaging and value-added services like ringtones. Our verdict: negligible impact. "Over the top" voice and IM are always threats, but Microsoft and Yahoo have far more interest in sustaining the status quo and finding ways of participating in the vast flows of cash from voice and SMS. As we wrote earlier, the real threat would come not from a "minute stealer" arbitraging voice and messaging revenues, but from someone who fundamentally re-thinks how users and merchants interact. There's little danger of Microsoft or Yahoo launching the ultimate replacement for the freephone number, or launching "free voice" to give away some other high-margin service.
Secondly, operators are tentatively getting into advertising, but are unsure what their role is or what the market opportunity really looks like. Ed - All covered in detail in our report on Telcos' Role in the Advertising Value Chain. If anything, the merger is good news as a provides a viable partner to negotiate with in opposition to Google.
Plus, we feel telcos are missing the big picture here. Advertising is only one small slice in the digital economy value system. In turn it's a part of a bigger revenue pool of marketing services, which is part of a set of business processes that run all the way from brand awareness to order fulfilment to payments to support. The job of the telco is to find ways to use its assets to support these general business processes. So rather than "how can I compete with Yahoo or VISA for adverts or payments", ask how you can become a supplier to those entities based on the knowledge and access you have to your own customers. It's more about helping the UPS man to deliver the parcel at a time when you're home, than stimulating demand for the thing you bought in the first place.
Thirdly, telcos are making baby steps towards being media companies, and offering suites of entertainment -- music, mobile TV, and IPTV. We don't think this will work out long-term in most markets. Media companies are finding it hard enough to stay afloat as is, without telcos piling in with naive expectations that content acquisition, aggregation, recommendation and distribution will all just fall into place.
Just as the vertically integrated early Web portals from AOL and Compuserve were un-picked, the same will happen here with "telly portals". Someone who isn't a telco will have a smash-hit way of blending video, interactivity and social networking. The job of the telco is then to be a logistics solutions provider in helping that application be realised. Give them access to the set-top-box user interface; allow third parties to access your content caches; and work out how to dynamically use the broadcast system to send the most in-demand content in real time, squeezing the rest down the broadband pipe.
If the media company with the great idea turns out to be Yahoo, so be it. But it doesn't change the telco's role of being a trucker for digital freight. If anything, the combination of online properties, the PC and the games console make the combined company a great prospective client for offering such services.
Lastly, Microsoft makes its money from enterprises, and is a key partner for operators with a large enterprise user base, or an IT integration/professional services arm. It's important not to upset this relationship. To it's credit, Microsoft has generally been very adept at maintaining a neutral position with respect to all the users of its technology. The Yahoo deal is unlikely to change that, and as Yahoo doesn't have a significant enterprise business, the deal has no significant impact on the enterprise channel for telcos.
Animal, mineral, vegetable -- three different kinds of company
Let's dig a little deeper and see why these businesses and complementary to telcos, rather than competing.
If often feels in the Telecoms-Media-Technology sector that there likewise three tribes who have little common mutual understanding, even if they are mutually interdependent. Nobody seems to understand all three of the emotive needs of users, the possibilities of technology, and how to monetise the gap between the two. Google, Microsoft and Yahoo are three very different companies with different DNA.
Google processes information. You enter a search term, they match it to web pages and adverts. They know or care little about what the data itself means. People are important to Google only to the extent that they seem to provide an endless supply of search terms and text to work algorithmic magic with.
Yahoo is (on a good day) a media company with the cream of the Web 1.0 community services. They understand how to bring together groups of like-minded people using professional and amateur content as bait. Unlike Microsoft and Google, they've not been so hot at making money from the result.
Microsoft is a technology arms vendor. They'd much prefer not to have to deal with end users at all directly, especially these messy online services and (worst of all) customer support or billing. Outsourcing that stuff to touchy-feely Yahoo probably feels like a big relief.
All three of these are involved in building complex online communications tools, ones which all too often confuse superficial usability with underlying utility.
What business are we in?
Telcos, if anything, have a lot more in common with Facebook or MySpace. These are presence-based services. By that, we mean the goal of Facebook is to give you a sense of the other person, as if they were there present with you. When you smell someone's well-worn favourite sweater, you get an indelible sense of who they are. Whatever the digital online version of that is, well that's what social networking sites do. You get the distillate of someone else's life. It's emotive, sensuous. Visceral, even, when it works.
That's what talk and text are about too. Over 80% of global telecoms revenue continues to come from those two products. The most valuable message in the world remains "I love you". Social chatter is the bedrock of telecoms revenue. We'd like to pretend it's all businesslike, purposeful stuff. It's not.
This works best when telcos offer super-simple, ubiquitous services. The job of telcos is to embed communications, particularly social chatter, into every possible context. It's not to think up thousands of new features and complex applications.
This gives us some clues where Microsoft, Yahoo and Google abut up against the telco business model. Where a phone call or text is about information transfer, you need to be afraid of Google. Dictating your name and address to a call centre agent is not efficient or pleasant. It's muda -- waste to be eliminated from our lean communications system. Likewise all those phone calls that do manual transfers of presence and location data -- "I'm on the train", "Nearly there, see you in five minutes". Google have already started to eat away the the telco information services business with their free 1-800-411-GOOG directory service.
On the other hand, telcos should be urgently opening up their voice and messaging platforms to outside innovation to keep them relevant. How can you re-package up your voice minutes with Yahoo's dating application? How can a date send you a voicemail without knowing your cell number, but only your Yahoo ID? None of these companies have a viable alternative to telco voice and SMS, so you've a lot more to gain by integration with them than you're likely to lose through substitution.
In other words, if the online giants are competitors, you've got the wrong business model. They should be customers.
A deal driven by fear
The subtext of the whole merger can be explained by the monster lurking in the background: Google.
Umair Haque notes how the genes of Microsoft and Yahoo appear to have what might be called "dinosaur DNA". They're both built for a mass-production era. You buy Windows, I buy Windows, but Microsoft doesn't know or care what we do with it. Google is different. They do care. A Google OS would carefully watch everything you do. Each piece of data is valuable. Every use choice and action is a potential sign of intent. Every intent can is correctly identified be matched to a piece of marketing from somewhere.
Google understand the value of data, and aggregating millions of pieces of data to create new value.
Google is also internally organised in a fundamentally different way. They aren't a top-down driven company with twelve-month budget cycles that determine the product plans for the next year. Google's internal economy matches the Silicon Valley outside. Projects continually compete against each other for people. Employees have significant autonomy over where they work. Google tolerates a "fail early and often, but particularly early" culture.
So another reason to be unconcerned is that Microsoft and Yahoo are two companies destined to address a lot of the wrong problems, and do it in the wrong way. Google remains a threat because they're ultimately willing to give away some core telco products to gather eyeballs and user data. Even if only nibble at the edge of the telco market, it could bring unwelcome pricing pressure.
Yet Google remains weak in knowing much about where you live, travel, who you interact with, and what kind of person you are. Telcos are rich in this data. The conclusion again is that there's scope to trade for mutual benefit. The theme over and over remains: view the portal players as customers, not competitors, for your communications platform services.
Finally, you could probably do a lot worse than take Netscape founder Marc Andreessen's advice to ignore the noise in the corner between fighting advertising aggregators, and just get on with building your own valuable company.