Resellers vs Product Builders, or how Econet may miss the internet opportunity

Strive Masiyiwa, Via  SM Facebook Page

When Econet announced its half year results last month, we wondered if Econet is in a position to leverage the internet for growth into the future. We wrote then:

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.

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 Over The Top services), 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.

That “Reseller vs Builder” comparison and the distribution advantage, are interesting in a clearer sense now and thought we’d share.

Put in the most basic of terms, the internet has disrupted the company’s distribution advantage, which increasingly amounts to little in determining its success into the future.

Disruption, first in that enabling network access is not limited to an oligopoly of Econet, Telecel and NetOne. There’s more choice into the future in how one connects to the internet – not perfect ofcourse but access is not limited to one company that has 70% of the marketshare. Into the future therefore it is wise for the group to keep investing in more connectivity infrastructure so that they can reduce choice. Bad for customers yes, but good for them commercially.

Disruption, second in that beyond getting a simple computer and an internet connection, internet entrepreneurs don’t need the operator’s permission anymore to build and sell something on the network. In the voice and SMS days (yes they are still here but going away fast) to reach Econet’s subscribers with a Value Added Service product, one literally had to ask permission. You’d give them a proposal and pray that it’s not rejected. Indeed,  many complained their proposals where rejected only to see the mobile operator launching and commercialising the proposed service themselves.

Losing control of distribution

On the internet, mobile operators like Econet do not control the distribution as strongly as they used to. To reach Econet subscribers, companies like WhatsApp and Facebook don’t need to send a proposal to the operator. They can provide a service and get paid for it from across an ocean. This is why the ‘net neutrality’ question is important for regulators to address. If not addressed, we will surely go back to the “permission asking” days and we all, including Econet itself, lose in the process.

In the past, owning a massive distribution network like Econet’s meant that the subscribers had little choice, and when customers have little choice, the first thing to suffer is the quality of service. This is why there was apparent little care by the company when their billing system ‘stole’ subscribers’ airtime. Having no choice meant operators could charge US $15 for a sim card which is now priced at just 50 cents only 5 years later. That’s why SMS’ was overpriced. We were stuck with bad products and bad customer service just because the operators owned distribution.

The internet took away the distribution advantage. Companies like Econet have to compete on the new front of quality of service. The design of the product and how you treat customers matter because the barriers to entry for the competition are very low. On the internet, small 5 people teams have been known to create formidable competition for large well resourced companies, enough for them to be bought.

If you think about it the reason people use WhatsApp for their messaging is because the thing works. It is designed well. It was designed by the company that sells it to meet specific needs clearly. There are other apps that were doing the same job WhatsApp does for us today: Facebook Messages, Skype, Mxit. The cost of SMS only played a part in making people prefer app based messaging over SMS and not WhatsApp specifically. Why everyone chose WhatsApp over the other apps is mostly the quality of the app.

To bring this back to our title, the distinction between Product Reseller vs Product Builder is very important when it comes to the quality of the product. People that design and build new products that they will sell themselves direct to consumers (companies like Apple, Google, WhatsApp and Facebook) have far more control over the quality of the product and the experience it provides. The assembling of the product (or even some inside components) may not be by them but the whole concept design is still by the company that brands and sells it.

Resellers on the other hand, usually have their hands tied when it comes to quality of the product. They resell whatever best is out there. The quality is determined by the manufacturer. The role of the reseller (like Econet is in selling Connected Car devices) is to secure the distribution rights and hope that the product will perform well enough in its current state, else they’ll have to request for changes. But when your order quantity is to satisfy a 75,000 car market like Zimbabwe, changes to the standard white labeled product can come at a price so high you’re forced to review margins or even if it’s worth it at all.

This is why, to resellers, locking down distribution matters more than product quality. When Econet locked down access to their mobile network, they could sell whatever poor quality product as long as it was marginally better than the 2 companies (one owned by government and the other by quarrelling shareholders) they competed against. They didn’t design the base stations, the billing system, Ecolife, EcoCash etc… It was 100% distribution economics.

It’s not to say however that you can’t have superior distribution in the internet age. You can (as Alibaba, or Apple through their App Store, have) it’s just that distribution is not the first thing anymore. The first thing is product quality. And to design superior user experience, you have to be involved as innovators from the concept stage up.

This is why I don’t believe that the new Connected Lifestyle business that Econet is currently betting its future on, really holds that much promise. I could be wrong ofcourse but everything about it speaks reselling, and in the connected era, it’s easy for a reseller to be disrupted because they have too little influence on user experience.

The founder of Econet says himself that he saw the Connected Car service in the US two years ago and quickly negotiated for a deal to distribute it in Africa, resulting in Connected Car. When it launched around this time last year the company spoke of a revolution in tracking cars and that ordinary people and companies would take up the service. The truth on the ground is that car tracking via SMS, smartphones and fleet office desktops had been available in Zimbabwe since at least 6 years ago (when I came across it at least) so Econet wasn’t bringing anything new to the market. If anything their solution was said to be more clumsy than existing solutions hence the slow uptake in the market. So unprepared for the reality on the ground they were that we’ve heard they had to give some of their key suppliers the choice to sign up or risk losing Econet business. Reseller & distribution lockdown mentality.

Econet’s car tracking application, one that relies less and less on SMS and increasingly on the internet, had to stand on its own merit as a superior product instead of relying on network distribution of an era fast disappearing.

This is the main reason I don’t quite buy the”fast follower” thinking that the company has said is part of its modus operandi. The internet and the tools it provides freely to anyone, allows everyone, big or small, to not just follow fast, but to use the tools to think about the biggest problems around them that need solving.

Buying a US internet product in bulk and to sell it as fast as possible in Africa might actually result in some very expensive mistakes. When you do this, you are likely to start relying on tenders, waiting for regulatory licenses, litigation, and negotiating with huge organisations like medical aid societies so you can have all their members buy a product you sell. The kind of stuff that’s hard to do if you don’t play golf etc… It’s not that these are bad things to do in business – actually they are brilliant – they are just not the things the innovative ones will rely on in the internet age.

Investment vs innovating from inside

Attempting to use tools of a previous era in a new age actually comes natural to anyone. We naturally use what has worked for us in the past. The only problem with this approach in a fast moving industry like technology is that our methods are likely outdated after just a few years. Distribution dynamics change and usually the closest people to the new methods are young people – the so called natives of that era. This is why it is important to appreciate that innovation in technology will 99% likely not come from inside (not even from the founder) but from outside. This realisation means heavy investment into and the acquisition of companies that were built from the ground up for the current technology age.

The keys to innovative health solutions in the internet age for example are likely not held by a contract negotiated between an Econet and a PSMAS just to launch a product customers hate (but, presumably, not have choice to ditch). It’s going to be by the young innovator who realises that he can use the internet to reinvent the whole concept of a medical aid society and tries to challenge PSMAS.

An Econet needs such innovators who build passionately in the internet era because these people care more about their product and less about the advantages of regulatory licenses, litigation and tenders. Again, it’s not that these things are not needed; they are a critical function of success and that’s actually where an Econet would come in after identifying startups to invest/acquire. An Econet understands how to secure licenses, scale, charge more and the other boring things that the startup can’t. Things Econet has become efficient at doing thanks to their 20 year history as a company.

Where in the past companies started by securing distribution, now they have to build or find builders of new products that are needed in the market. These products mostly don’t exist yet, even in the US because the needs there are vastly different. These are the people to invest in, not BEE entrepreneurs.

Innovation at the pace of mobile operators

When Econet just sees solutions in the US and negotiates for distribution rights in Africa, they miss the opportunity of the internet entirely. Again, this is why the net neutrality question is critical for the regulators in Africa to address, because the continent cannot afford to move at the pace of mobile operators who are thinking how best they can hold on to distribution networks so they can continue buying and selling.

The continent stands to benefit immensely from the opening up of the internet to everyone equally because that’s the only way we can capture the spread of talent that enables new ideas beyond the imagination of the few of us building products on the internet. It’s not coincidence that China Mobile (the largest mobile operator in the world) doesn’t own the largest e-commerce company in the world; it is a guy who was once a simple English teacher in China.