Railways and WhatsApp

Once upon a time, someone decided that the train service from London to Birmingham was terrible, and that a bus service would be much better. So they started a bus company. However, once they were up and running, they found that it would be much more efficient if they built big bus stations in the centre of each city. And to get the loading to work better, you want to get 8-10 buses linked together as one vehicle. And then you really need to raise money and build a dedicated road from London to Birmingham...

The point is, buses can be much more flexible or efficient than trains, but you need to be careful you're not actually planning to build a train after all. Are you trying to unbundle an existing product with a more flexible tech that allows a more flexible product - which is where buses beat trains - or to replicate it?

This is a recurrent problem in mobile - there are wireless technologies around that look like they should be able to disrupt cellular operators, but actually they never do, because to disrupt cellular you need another train line, not a bus.

Mobile LOOKS like a tech business where tech should change things, but most of the money in a new mobile network goes on base stations and three quarters of the cost of an urban base station is in the construction and site acquisition, not the equipment (the cost of a national fibre network, meanwhile, is irrelevant). And the number of towers you need to get enough coverage for the first customer to sign up has relatively little to do with the technology you use - it's down to the physics of in-building penetration at the frequency you're using and the number of hills and mountains there are. (Technology has a big effect on the number of towers you need to build later for capacity, of course, but not for coverage.)

Hence the problem with disrupting mobile networks with new radical technology: the notional efficiency gain tends to get buried by the rest of the underlying economics of the system, all of which you need to build just the same. 

Hence, for example, the now totally failed attempts to use WiMax for mobile service were a bit like replacing diesel engines with electric: you might or might not choose to do it if you were building a national train system from scratch, but the real money would be going on tracks regardless. The same applies to wifi, which in which the bus v train analogue is almost perfect - wifi is great, but if you try to use it to offer a mobile service you end up building, well, a mobile network, with no cost savings at all and, in fact, a much less efficient business than you'd get if you'd started with the right technology in the first place. 

Of course, none of this is to say that you can't disrupt the mobile network industry in any given country. But you do it by being a mobile operator - by getting spectrum, and building towers, and (very often) by getting the regulator to put a hefty thumb on the competitive scales in your favour. 

As an aside, one of the things that dropped out of the great MVNO bubble of 7-8 years ago is that a reseller can't disrupt the person whose infrastructure they're reselling - unless, again, the regulator imposes disruptive wholesale rates or the telco screws up and sets the prices too low (as One2One/T-Mobile did for Virgin Mobile in the UK), or just uses MVNOs to fight a price war by proxy (which I don't think really counts as disruption). MVNOs need an angle, whether that's being a supermarket, or targeting immigrants, or something else - just being an MVNO isn't enough. 

The place in which technology really IS affecting mobile network operators, of course, is in what goes over the top - WhatsApp versus SMS, with voice coming next. Unlike a pure infrastructure play, these are essentially unbundling stories, and they’re aiming unbundling at the right part of the system. Of course, that's not how a telco sees them - a telco sees them as arbitrage.

The classic telco arbitrage story was long distance and international. Long-distance and international connections used to be very expensive, no longer are, but telcos pricing had not fallen to match, and first calling cards and then Skype arbitraged the difference between the list price and the real economics of long-distance or sub-sea fibre. Mobile messaging apps do something similar for data, arbitraging the gap between the economic cost of a few K of data and the price charged for SMS.  As cellular data speeds go up, we should expect voice apps to take off in a big way as well: the pricing gap is not as big but things like on-net/off-net call pricing will also go away (with both positive and negative margin effects for telco, for reasons I won't go into here). 

(Incidentally, VOIP annoys mobile operators on principle since it tends to use several times more radio network capacity than a circuit-switched call, as it's not optimised for how the network functions (this will change with LTE). Hence VOIP on cellular is an interesting example of new technology that actually has worse real underlying economics than the product it attacks.)

How much does this matter to mobile operators, though? There's also another train analogy that's applicable here: Roald Dahl wrote a story about a character who made a living by arbitraging railway luggage fees. He had noticed that, while you had to pay the railway a luggage fee based on what your luggage weighed, if the scales showed a negative number then the railway company had to pay you. So he travelled everywhere with a large suitcase full of helium and charged the railway company a fee. 

The idea that OTT messaging services pose some sort of existential threat to telcos remind me a lot of this story. If the railway company can't change the pricing system and everyone goes out and buys a helium suitcase then yes, they're screwed. But telcos can and do change their prices. And that helium suitcase doesn't somehow change the cost of coal or locomotives. You're not using innovation to uncover a new set of economics - you're just hacking the pricing plan. 

Hence, the challenge for mobile operators is to change their tariffs. WhatsApp and Facebook Messenger do not change what it costs to provide you with a pipe. If the technology now means that the pricing scheme is no longer aligned with the economic cost of the network, you need to change the pricing scheme. 

There are two problems in this, though. The first is that repricing a business whose main competitive dynamic is complex and highly-wrought pricing schemes is a nightmare. In the short-term churn will shoot up and in the long-term moving to unlimited bundles means you cap the ARPU from your whales - all those people currently paying €200/month for voice calls will drop down to your €50 unlimited plan. You may well end up with a lower ARPU than before. The second is that if you have less freedom to offer complex pricing schemes you face the risk that the market will move to much more commoditised, easily comparable pricing, with a consequently much higher likelihood of price wars. Both of these issues are essentially transitional, and will vary a lot by country - in some places the transition will be fairly smooth and in others it’ll be painful and result in a step change downwards in ARPU. The arrival of data bundles is a great example - US operators added them to people's plans, pushing ARPU up, but European operators weren't able to get away with a price increase because the markets were much more competitive. The end of separate SMS pricing will see similar differences. 

The big problem that these products pose to MNOs, it seems to me, is not actually the threat to SMS revenue. Rather, it’s the threat to identity. We do already have number portability, but changing your number remains a major frictional issue reducing churn. But if your contact point moves to FB Messenger or some yet-to-be-founded app that explodes in the next few years, then the SIM you have in your phone today doesn’t matter at all, and you could swap it in and out from week to week depending on which mobile operator was offering the best deal - a great recipe for truly murderous price wars. For a really killer effect, of course, you’d have to combine that with an end to the subsidy + contract model, which is far from certain (and would also be terrible for Apple and Samsung). But that’s the threat. 

Facebook, identity and throwing sheep

Way back in the dark mists of time, when Facebook first launched its platform on the desktop, one of the first hit apps was something called 'Superpoke'. Superpoke did quite a few things but the one that got all the attention was throwing sheep at people. That is, they'd open their Facebook news feed and it would say 'Benedict threw a sheep at you'. 

Of course, a website that did that would never work - you'd never get a critical mass of people to open an account on a new site just for that. But Superpoke could plug into the Facebook platform so you could do this fun little social thing right away with almost no friction. 

A lot of the social apps bubbling up now remind me of this. As I've written several times, by plugging into the smartphone address book, camera, photo library, notifications etc the frictional barriers to doing a new social app fade away: the smartphone is a social platform in the same way that Facebook is. The obvious expression of this is WhatsApp and similar things that directly address the core Facebook use cases. But it seems to me that there's at least as much potential in doing things that use the platform without trying to take over a core use case - things like throwing sheep. That is, the smartphone social platform enables a lot of experimentation with new ideas and behaviors that don't need to be your core comms channel and that would never have worked on the web, and (for a bunch of reasons) might not have been possible on the desktop Facebook platform.

Snapchat is arguably one of the biggest of these, and Secret is another. Firechat is also an interesting example - it leverages the wireless autodiscovery features in iOS7 to do hyperlocal chat. Of course this isn't quite as easy as Superpoke - you still need to install an app from the app store (for now, though that may well change) but the friction is still pretty low. With apps like Line, WeChat and Kik you can see people trying to pull this experimentation back up the stack and put it inside a social app again - that might be the right model for some things, but of course you're trading friction for flexibility. Making your own smartphone app needs that initial install but has much more power. 

I also think that (as I suggested here) retailers should be thinking about how they can leverage the social platform aspects of smartphones - shouldn't the Zappos app show you which of your friends have it and let you share shoes directly? Again, doing that well on the desktop would be really hard, but on a smartphone it's just a tap or two away. 

This takes us around to Facebook again. Perhaps the problem is not that people use WhatsApp instead of Facebook Messenger - rather it might be that they use Sephora instead of Facebook Messenger. This is partly about unbundling WhatsApp, just as WhatsApp unbundled Facebook, but it's also that the fads and gimmicks and silly little things (otherwise known as 'fun') don't happen within Facebook. The time sinks don't have to happen within Facebook. And maybe the commerce apps don't need to connect to it. 

The question implicit in all of this, of course, is identity. It's the machine-readable identify that allows all of this low-friction social experimentation. But what is the irreducible common denominator for connecting to your friends? Is it your Facebook identity? How much does it matter to Facebook if it isn't, if it still happens in something Facebook owns? Is it your PSTN phone number (which Facebook will actually let you use to find friends with the smartphone app)? Or do you change that from time to time without caring? The broader phone address book? Your email address? BBM Pin (cough)? Location? Would Apple try something within iOS (with the fingerprint scanner)? Where in the stack does the identify sit - the network, OS platform or something further up? Actually, I suspect there isn't any single common point that any company can own. 

Social messaging consolidation

In the last couple of years there's been an explosion of social messaging apps, of which WhatsApp was obviously the breakout hit. But one could easily suggest that in buying WhatsApp Facebook is just playing 'Whack a mole', with dozens of other bubbling up: last summer I went through Google Play and found 50 such apps with over 1m downloads.

The data all of these give is highly variable, though - downloads and user aren't the same thing and though many apps give user figures occasionally, 'users' often means 'anyone who ever downloaded our app' (which WhatsApp has complained about, making a point of giving MAUs) and many don't even tell you that. So it's interesting to look at Google Trends for some of the biggest names that have been floating around. (And yes, Google trends is indicative but far from authoritative). 

First, compare WhatsApp, where we know the numbers, with a few of the bigger names. 

(Comparing WhatsApp with Blackberry and BBM is also instructive.)

Now, keep Viber for scale (it reported 100m MAUs when Rakuten bought it in February) and add a couple of the names that have floated around as regional winners. 

Now compare Nimbuzz, an Indian player, with WhatsApp in India. 

Now, a couple of the US hits. 

Small globally, but big in the USA. 

The big gap in this, of course, is that we really can't use it to look at the really big contenders - Wechat is still mostly in China where Google Trends is useless, Kakao in Korea has the same problem, and Line is too generic a search term to tell us anything much. 

I've argued elsewhere that the lock-ins Facebook enjoyed on the desktop are much weaker on mobile - that it's much easier to switch between services and to use several at once. But at the same time, it does appear that WhatsApp has much greater scale than the alternatives globally (unless there's a huge new app I've just not heard of yet, which, frankly, is entirely possible). Still, there's a lot of regional variation: WhatsApp is certainly not dominant in the USA, China, South Korea or Japan. And (having said you can't use Google Trends to look at Line), Indonesia shows a fascinating mix. 

As I suggested here, perhaps part of the future is messaging within other apps, rather than lots of dedicated messaging apps. 

Three phases of messaging

Thinking more about the acquisition of Whatsapp and Viber, it strikes me that there are three phases in the evolution of these kinds of products (so far).

The first phase was about price and the PSTN. The cost of roaming and the cost of  international voice bore little connection to the underlying infrastructure cost, and a host of startups emerged to try to arbitrage between high list prices from mainstream telcos and the low underlying cost, using the data channel to go 'over the top' (OTT). 

The obvious winner was Skype, which unlocked vast demand for free voice and meaningful demand for actual paid international voice. Skype upended the calling card business, which did the same thing but on a smaller scale with a worse UX and a different route to market, but had very little impact on mainstream telcos, since international voice, though high margin, had never been a big part of their business - most people don't know anyone abroad. Skype was the big success but there were many other companies trying to do things in this space around roaming and international, few of which became meaningful businesses despite often doing some technically very clever things. 

The second phase came with smartphones (Skype wasn't really mobile to begin with), and is partly also based around arbitrage, in this case between unmetered data plans and metered SMS. BBM (not entirely intentionally) was one of the first but  a swarm of other companies (at least 50) offer free or near-free text messaging. 

This is a challenge to telcos, who have found splitting out SMS and selling it separately a convenient marketing tactic (when I worked at Orange the pricing department was called 'Value Based Marketing'). Hence, mobile operators must now rebalance their tariffs, rolling data and SMS (and indeed voice) into a single monthly plan - this poses all sorts of transitional problems but the actual financial impact varies wildly by country -  see here for a discussion. 

Once the telcos have gone through this process, pitching an app on 'free SMS' is not much of a pitch. However, most of them do more than this, adding anything from group chat all the way up to the full-on content distribution platforms of Line or Wechat (discussed here). What they almost all have in common, though, is that they use the PSTN numbering system but never connect to the PSTN. That is, they look at your phone book and use your phone number to identify you and see which of your friends have it, but they don't actually make phone calls or deliver any SMS. So for these apps the PSTN is a social graph but not a piece of infrastructure. Add things like home-screen icons and push notifications and one sees that the smartphone is a social platform, in a way that the desktop web never was. 

In other words, Skype's strategy was all about the PSTN but Line or Whatsapp effectively ignore it (though Line does do some bundling deals with MNOs in emerging markets). 

I think, though, that there's also a third phase. Why is it that if I use a cab service app I can only talk to the driver by a PSTN voice call or SMS? Why does a restaurant booking app send me out to the phone dialer? Isn't it inevitable that at some point they'll bring that loop in-house? Shouldn't that, also, become part of the generic data layer rather than the telco's voice or messaging layer?

Moreover, why should it only be explicitly social apps that access the phone address book to find my friends? Why shouldn't a retailer's app tell me that I have 8 friends using it, and let me share products with them rather than emailing them dumb, untracked URLs or even, quite probably, screenshots of my smartphone with the app open?

In other words, WhatsApp, Instagram and a dozen others have unbundled Facebook, but at what point and in what ways does WhatsApp itself get unbundled?

Whatsapp and $19bn

Facebook just bought WhatsApp, paying $16bn in cash and stock ($4bn cash, $12bn stock at current prices) and $3bn in RSUs. WhatsApp has 450m active users, of which 72% are active every day. It has just 32 engineers. And its users share 500m photos a day, which is almost certainly more than Facebook. 

This is interesting in all sorts of ways - it illustrates most of the key trends in consumer tech today in one deal. 

First, it shows the continued determination of Facebook to be the 'next' Facebook. It's striking to compare the aggressive reaction to disruption shown by Google, Facebook and other leading web companies today with how some of their predecessors a decade ago stumbled and lost their way. 

Second, the winner-takes-all dynamics of social on the desktop web do not appear to apply on mobile, and if there are winner-takes-all dynamics for mobile social it's not yet clear what they are. There are four main aspects to this: 

  • Smartphone apps can access your address book, bypassing the need to rebuild your social graph on a new service
  • They can access your photo library, where uploading photos to different websites is a pain
  • They can use push notifications instead of relying on emails and on people bothering to check multiple websites
  • Crucially, they all get an icon on the home screen. 

Any smartphone app is just two taps away - a desktop site can crush a new competitor by adding it as a feature with a new menubar icon but on mobile there isn't room to do that. Mobile tends to favor single-purpose, specialized apps.

This has led to an explosion of mobile social apps - last summer I counted over 50 with more than 1m downloads on Google Play. Some sort of consolidation is clearly inevitable but it's much less clear whether we will revert to one or two. The smartphone itself is the social platform and all sorts of different ideas can leverage that, where on the desktop web they'd have needed to leverage Facebook.

So It's quite possible mobile social will have lots of services indefinitely. This creates opportunities, but also a pretty basic challenge to Facebook. Partly in response, it paid first 1% of its market value for Instagram and now close to 10% for WhatsApp, taking not dominance but at the least two of the commanding heights of mobile social. That's the right way to think about value, I think - not 'OMG $16bn!", but "is this worth 10% of Facebook?' The deal values WhatsApp users at $35 each (very close to what Google paid for YouTube, incidentally), but the current market cap of Facebook values its MAUs at $140 or so.  

Third, the sheer scale of the numbers involved is a good illustration of what the shift to mobile means. I produced a presentation here to try to drive home this point: mobile is the next computing platform and it is several times larger than the desktop internet. There are now roughly the same number of smartphones and PCs on earth - those PCs are mostly shared and immobile or locked-down corporate boxes, while the smartphones are mobile and personal. Meanwhile, the widely-discussed collapse in the cost of creating a startup in the last decade combines with both the much larger scale of mobile and the routes to market and virality offered by mobile platforms to mean that if you're very good (and lucky) you can get to astonishing scale in a short time. This scale is at the heart of the valuations we're starting to see - WhatsApp is probably now sending more messages than the entire global SMS system.  

Finally, mobile social apps are not, really, about free SMS. Mobile discovery and acquisition is a mess - it's in a 'pre-pagerank' phase where we lack the right tools and paths to find and discover content and services efficiently. Social apps may well be a major part of this, as I discussed in detail here. These apps have the opportunity to be a third channel in parallel to Google and Facebook.

Also, note this tweet from the co-founder. 

(Note: my boss at a16z, Marc Andreessen, is on the board of Facebook - the posts linked were all written before I joined)

Interaction, canvases and ecosystems

Suppose that in 5 years or so I send you a Yelp review of a restaurant, from my phone to yours. What will that mean? 

  1. First, I might well use something like Airdrop, or touch my phone to yours to pass it across, or tell Now to give it to you, or indeed Now might decide to give it to you without my even explicitly asking. Or the review might be invoked by a Bluetooth LE beacon as you hold your phone next to the menu on display by the door
  2. But for the sake of simplicity, suppose I send it to you using an internet messaging app - either one built into the OS or a third-party one - Facebook, Whatsapp or more probably one that doesn't exist yet but by then has 15 engineers and 1bn MAUs. 
  3. It seems pretty unlikely that you'll see a dumb URL string on your screen. Rather, you'll get something rich and interactive, within the message.
  4. And you'll be able to go into that experience and tap the number to call the restaurant, or make a live booking, or swipe through photos.
  5. And if you tap 'book', it'll pass them a $10 booking fee in bitcoin, authorised with a fingerprint swipe. 
  6. Now suppose you decide to save this item, as an icon on your home screen, or some other yet-to-be created place. 

Now, what were you using? An app? a widget? Native code? What programming language? Did you install an app or surf the web? I'd suggest that none of those questions would really mean anything, at least not as we think of them right now. The programming language matters much less than the user flow. And some of this example sounds 'webby', but Google is the first to advance interaction models that are not remotely webby (such as Now). 

This is a pretty simple illustration (an expansion of the super-hot card metaphor) of a broader point I've made before: on the desktop internet, the web was by far the dominant model and that didn't actually change very much for well over a decade (before that, the interfaces of Windows and Mac were also very stable for a long time). But on mobile, not only are other models just as important as the web, but they're not remotely stable, settled or mature. The platform war may be over but that doesn't mean things are settling down. 

So I have very little idea what precisely I would mean if, in 5 years, I were to say 'I installed an app on my smartphone'. Further, I'm pretty sure that if it's an Apple smartphone it will run an iteration of iOS but I'm rather less sure what Google will have done with Android and Chrome by then. And of course I might be running a fork of Android from Amazon or, perhaps, Microsoft. 

This is the key reason why the new social messaging apps are so interesting - not because they have users and inventory now, but because they can be vectors for some of this sort of behaviour - a third acquisition, discovery and distribution channel besides Facebook and Google.

This may also have implications for any discussion about what it means for Apple that its ecosystem will have a minority of mobile users. We need to think about what it means to call a ecosystem that might have 800m-900m live devices 'minority', but we also need to think about what 'ecosystem' might mean. What, if any, 'winner takes all' dynamics operate in this environment? One reason the Mac didn't die was because the web changed what it mean to be a computer ecosystem: the mobile ecosystem has lots of changes to come too. 

Mobile interaction models

The interaction model for the desktop internet was pretty much settled 15 years ago. It turned out that the answer was a web browser. Stand-alone apps such as Pointcast were a mostly blind alley, and while apps persisted for email and IM, and for very specific things like music, the words ‘web’ and ‘internet’ became effectively synonymous to anyone non-technical. Over time we added Ajax and better search and better social, but everything really happened inside the browser.

In mobile this is quite different: nothing is settled. We have the web and apps and of course app stores, and then we have many complications - voice, in-app payments, web apps, hybrid apps, widgets, push notifications, social messaging apps, Google Now and Siri. Then there’s the hardware layer - images, barcodes, NFC, bluetooth, location, motion sensors etc. Innovative and disruptive new interaction models can very often find a route to market, far more easily than they could on the desktop internet. Sometimes, they scale to a hundred million users in a year to two. And we have more and more waves of innovation coming, with things like local wireless from Apple and deep linking to within apps from Android, and a very fast-evolving social messaging space, and more things in 2014 and beyond.

So, we can actually have a pretty limited idea of what the dominant interaction models will be in 5 years. 

(There is a dream, of course, that all these nasty choices and options will go away and we can go back to the nice, simple, limited web, but that doesn’t seem very likely just yet.) 

One of the big changes here is the removal of monopolies. If the web is not the only interaction model then web search loses power as a discovery and acquisition channel. And in parallel Facebook’s desktop monopoly on social has not transferred to mobile and it seemly unlikely that it ever will (I wrote about the reasons for this here). So both of the key channels on the desktop are smaller and less crucial, and also work significantly differently, and are pretty poor at driving some key types of engagement, now that you’re not just looking for a click on a link. This changes lots of things, and creates lots of new opportunities.  

The puzzle for Google is how it brings its vast, decade-old machine learning project to bear on this new complexity of data and behaviour. The obvious problem is that data and behaviour within apps are effectively dark matter that it can’t track (hence the deep-linking initiative in Android). But this is balanced by much richer data collection. Your Android phone feeds it with data all the time - where you are, what you look at, where you go after you search and what you did the day before. The challenge is finding the right ways to collate and present that data - Google Now is one example but probably not the only one. The search box and the page of results is just one possible interface to that machine-learning project - what does Google look like after the search box?

Social faces a different set of challenges. It seems to me that on mobile Facebook will never have the near monopoly that it briefly enjoyed on the desktop - smartphones remove most of the frictional barriers that keep you on one social network. But mobile social more broadly is a vast opportunity. With web search no longer the dominant channel, social, on a far more social device than the PC, has an open door to push at. Tencent announced that the first 5 games that it launched with Wechat integration, starting in August, have had 576m registered users. Mobile social is an engagement, interaction and distribution channel, and it appears to be much richer, and probably much bigger, than social was on the desktop. 

If this is the end to near-monopolies in acquisition and discovery, it’s also interesting to think about it as the end to monocultures. If the interaction model shifts away from web search, that change makes different models and different types of behaviour possible. In turn, one might ask - what models and companies and behaviours were precluded by Google on the web? What good ideas didn’t work because of the way Google did search and the way Facebook did social? How did that monoculture shape things, and how does that change now?