A profitable business model is the path to truth

When I was at iBurst (now RAIN), we built a phenomenal company culture that attracted people from all over the industry and repelled the odd bad apple that slipped through the net.

The trouble was we didn’t make any profit. Not only didn’t. Couldn’t.

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After a lifetime of dinner table conversations with my dad, I assumed I knew how to make money in telecoms. Get a licence. Build a network. Build a brand and distribution channel. And wait for the money to roll in. I did all of that. And the money did indeed roll in. The trouble was that there was more money rolling out than rolling in. We simply couldn’t make a profit.

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We made plenty of operational mistakes, but the fundamental problem was not execution.

The problem was strategy: We had the wrong one. I thought both telecoms categories, voice and data, were the same. I was wrong. Businesses built on voice revenues (i.e., traditional mobile operators) have a much higher profit margin than businesses built on data revenues.

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Why is that?

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Back in the ’90s everyone underestimated the demand for cellphones. So when the Vodacom’s and MTNs of the world were starting up, they set their retail prices very high so that they could be sure to make a profit. For example, Vodacom forecasted it would have 50,000 customers after five years. In order to make a profit, it calculated that it needed to charge R1.80 per minute.

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Vodacom reached 50,000 customers after six months. That’s twenty times faster than it forecasted. But Vodacom didn’t lower its retail rate of R1,80 per minute, which means it was twenty times more profitable than originally planned. This is why Vodacom and MTN became the biggest brands and among the biggest companies in SA and Africa. They were fuelled by hyper profits.

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Voice is hyper-profitable. Data (internet access) only came along a decade later. That’s what iBurst was selling. Data. Buy a router from us, pay R700 per month, and connect to the World Wide Web at 5Mbps.

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We rolled out iBurst’s network from 2006 to 2009. We spent hundreds of millions of Rands building base stations, transmission networks and data centres. And then we spent hundreds of millions of Rands every year paying salaries, rent, and maintaining our network. The trouble was we weren’t selling voice at R1.80 per minute. We were selling data at R700 per month.

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The economics of voice and data

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Here’s a comparison to give you an idea of the economic difference between voice and data:

At iBurst, we gave you unlimited data for R700pm. That includes unlimited voice (VOIP) calls. All for R700pm. Now equate that to Vodacom. If you were to spend 120 minutes (two hours) daily on your Vodacom cellphone and not use your mobile data at all (no email, WhatsApp, SMS, YouTube, Facebook), your bill would be R6,480pm, assuming out-of-bundle rates.

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R700 vs R6.480.

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That’s nine times more revenue for the same capex and operational spend. Non-profit vs hyper-profit, which is why iBurst was always chasing its tail. Just as we’d get our noses ahead, there’d be another price war or technology change. And we’d fall back. Wireless broadband is like a game of snakes and ladders, without the ladders. And yet Vodacom and MTN make a lot of money selling data, how’s that possible?

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They have a massive “installed base” of voice customers that provide them with creamy voice profit margins. That same base allows them to immediately monetize data infrastructure, speeding up pay-back. For example, Vodacom already has thirty million customers. So, when it upgrades its fifteen thousand base stations to 5G, that infrastructure immediately starts generating revenue.

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Compare that to a pure 5G network being built from scratch. First, no creamy voice hyper-profit margins. Second, you must spend years building a network and customer base before you can produce comparable revenues to the likes of Vodacom, which achieves revenue scale on day one. This brings me to the true strategic crux of broadband:

Traditional stand-alone wireless data networks are not profitable.

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Let’s assume you somehow have the cash and the courage to build a national 5G network from scratch, and then you spend tens of millions building a brand and acquiring customers. It will take you at least five years to reach profitability, and just as you get your nose in front, BOOM!

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6G arrives. Faster data.

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Who wants 5G when they can have 6G? No one.

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So, you’re forced to rip out and replace your entire 5G network with 6G. Now you’ve doubled your input costs, but you can’t double your retail price because the consumer expects to pay less money for more speed every year.

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You miraculously pull it off. You somehow replace 5G with 6G and keep your retail prices low enough to attract customers, and after five years, you get your nose in front again.

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BOOM!

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7G arrives.

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The wireless data business is snakes and ladders, without the ladders.

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The incumbents like Vodacom and MTN are trundling along, sweating their 5G, 6G, and 7G network upgrades with their installed customer base.

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That is why I swore never to start or run a wireless broadband telco ever again. I don’t like snakes and ladders without the ladders. I only like snakes and ladders without the snakes.

But I didn’t know all of this back in 2008. I was financially incentivized to believe a lie: Wireless broadband is profitable.

Which is why we were forced to sell complicated products.

It was the only way to make a profit.

Much better to find a simple honest path to profit.

The only way to offer a simple honest product is to have a profitable business model, which wireless data is not.