Change is coming with consequences far more significant than young replacing the old

On a cold Thursday morning in Barcelona, Gopal Vittal, the boss of Bharti Airtel (India), lashed out at messaging application firms such as WhatsApp and Line in a somewhat rambling tirade.

“Telecom companies are subject to regulation and jurisdictions. Many of these companies [WhatsApp, Line] operate outside regulations and jurisdiction. I think we need a framework by which these companies are subjected to similar jurisdiction,” the Bharti Airtel chief said, on the sidelines of the Mobile World Congress (MWC) trade fair.

In many ways, Mr. Vittal and his grievances are perfect snapshots of how the world’s biggest mobile conference has changed over the last six years: a balding middle-aged man in a three-piece-suit complaining about how the 20 year-old upstarts in jeans and t-shirts have taken over at MWC. Here’s another example of how things have changed: in 2009, Facebook’s engineers started showing up at MWC. Back then, Facebook was a rising star but was still far from the powerhouse that it has since become. Everyone at the time thought it was cute that the ‘application guys’ had come to play with the big boys at Barcelona.

But here we are, just five years later, and Facebook has acquired WhatsApp for $19 billion with WhatsApp’s messaging traffic now poised to overtake global SMS traffic. More on this, we will discuss a little later. For those unfamiliar with MWC, it is the world’s leading mobile conference, and the most concentrated venue for meeting people in the industry. There are very few other conferences that can compare with MWC’s density, or the number of back-room deals that are struck over endless bottles of Spanish wine.

Amazing transformation

But over the last six years, there has been a remarkable transformation in the what ‘mobile’ really means — much to the detriment of the telecom industry. The MWC show used to be a place where, quite simply, telecom equipment and software vendors gathered to hawk their wares to telecom operators.

The halls of the Fira Gran Via exhibition centre used to be filled with grey beards and Nordic accents. MWC was a show for all things ‘carrier-grade’ and the exhibitions were correspondingly filled with fiddly equipment like base stations and antennas.

Software vendors thronged the halls to sell obscure products with even more obscure acronyms like BSS and OSS. It was not even uncommon for companies to make presentations about products that were not easily discernible! This, of course, was the long process by which integration software was sold around, and then passed off as custom software for telecom carriers.

Much of this began to change as the popularity of the smartphone began to rise. Software and application vendors started becoming more important; thereby reducing the average age of the MWC participant.

Ericsson and Alcatel Lucent, which used to have the most crowded booths, have now given away to Google—which, for the longest time, had the most crowded booth with its giant slide and Android pins. (The last few years have seen Google stop hosting a booth, with its hardware partners taking over the spotlight, but the change has taken place nevertheless.)

“We have no choice but to change, as our industry goes about an entire transformation,” Ericsson CEO Hans Vestberg told an audience packed with his company's customers and vendors at MWC. Mr. Vestberg is right. Much of MWC used to be about all those OSS/BSS system vendors, who were focussed on facilitating services like SMS for telecom companies.

In 2009, SMS traffic was at an all-time high, and much of the telecom ecosystem was centered around building products that could help manage text message systems. However, just last week, Facebook paid $19 billion to acquire a company whose messaging traffic is now set to exceed global SMS traffic!

Think about it. A company with just a handful of engineers has succeeded in building a platform that essentially replaces and replicates the multi-million dollar systems sold by dozens of multi-billion dollar vendors. The idea of building a ‘carrier-scale’ system, therefore, no longer carries the same connotations it once did.

It is clear that improvement in software and the way computing has become cheaper has radically upset the telecom industry’s competitive landscape. As in so many other industries, technology has helped the end-user slip away from telecom companies such as Airtel and Vodafone.

All this change has made life very difficult for telecom companies, which are still essential cogs in the system. Not only do they have to navigate maze after maze of government regulation, they also need to continually invest in base stations, and have access equipment installed. The true tragedy is that they need to continue doing this grunt work while watching much of the value and cream on the top shift away to companies like WhatsApp. In some ways, the frustration behind Mr. Vittal’s grievances, if not his exact complaint, is justified.

Airtel, for instance, was able to post its first quarterly rise in profit in four years this January on the back of vigorous cost-cutting.

But the future doesn’t look too good; in fact, the only way for an emerging market telco to make money off data is by segmenting content types. Or, put more simply, by charging high-consumption data users a higher tariff when compared to their low-consumption counterparts. This is essentially a violation of the principles of net neutrality, and would result in an ‘Internet tax’— something that’s bad for both consumers and content providers like Google and YouTube.

Change is coming nevertheless — with consequences far more significant than young people replacing the old — and we can only hope that the incoming telecom system model is economically viable for all its participants and better suited for its consumers.

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