ONE of Zimbabwe's leading telecoms players, with more than 70% market share (based on subscribers) has of late been flighting full-page adverts on a product, promising savings of 20% on existing telecoms costs. Instinctively, my reaction to this advert was to surmise that telecoms incumbents could finally be embracing a low-balling strategy, in reaction to newer players offering low-tariff calls.
Could it be that the telecoms industry's older players are upgrading their estimation of the potency of the threat posed by disruptive attacks being launched by the industry's latter entrants such as Africom?
In this article, Africom is used to typify newer telecoms players, while Econet is used as a typology of established telecoms players. It turns out the new product, though branded differently, is in essence based on the voice-over-internet (VoIP) platform. VoIP is a technology that allows voices calls to be made entirely over the internet, by-passing the traditional voice transmission infrastructure. By obviating the need for securing and maintaining expensive telecoms infrastructure, VoIP calls be offered at ultra-low price points to potential consumers. Econet's VoIP local calls, as advertised, range from 6 US cents per minute for intra-network calls to 12 US cents per minute for calls destined to other local networks. Africom's local tariffs are a mirror image of Econet's local VoIP tariffs.
Similarities between the tariff structures for Econet's new VoIP telephone product suite, and Africom's voice call offerings could at face value point towards similar business strategies. Nothing could be farther from the truth.
Same price, different technologies
A fundamental difference between Africom and Econet rests on the telecoms standards they employ to transmit voice and data. Econet uses the Global System for Mobile Communication (GSM) family of standards while Africom deploys the Code Division Multiple Access (CDMA) family of standards, including the fairly advanced CDMA2000. Both GSM and CDMA standards can allow calls to be made from cellphones using cards, SIM cards in the case of GSM and UIM cards in the case of CDMA.
For the consumer, these differences in nomenclature are to a larger extent immaterial, if not irritating. It is not the intention of this article to delve into the technical nuances of these standards. What is relevant to this discussion are the business implications offered by these standards. From a business perspective, Africom is able to offer voice calls at lower price points than Econet's GSM cellphone-dependent voice calls. Two questions arise: First, why can't Econet just switch to CDMA and offer voice calls at lower price points to its current 6,4 million subscribers? Second, if Africom can profitably offer good quality voice calls on cellphones, why is it such a small player, if not nearly a fringe player?
To be able to address these critical business strategy posers, we will elicit the wisdom offered by two good management theories on technological change, namely competence-enhancing versus competence-destroying, and modular versus architectural. Tushman and Anderson (1986) advanced the competence-enhancing versus competence-destroying technological change theory.
They found that when incumbents in an industry face a technological change that makes the incumbents' skills, knowledge and experience redundant, they surrender their market dominance to players whose current stock of competences can leverage on the new technology. Modular versus architectural technological change, the forerunner to the disruptive change theory, helps us assess the likely consequences of switching from GSM to CDMA standards or vice versa.
Henderson and Clark (1990) were the first to note that when leaders in an industry are faced with technological changes that affect the individual components that make up a technology (modular change) as opposed to changes that birth new interrelationships between and among constituent components (architectural change), incumbents have a high chance of maintaining their market dominance. Put graphically, as long as a house owner is required just to change doors and window frames, they can cope.
Asking them to change the foundation may be overwhelmingly demanding as that would imply razing the house to the ground and starting afresh. According to the modular versus architectural change theory, Econet would be expected to maintain its leadership in Zimbabwe's telecoms industry as long as changes to the GSM-dependent technologies affect just the specific individual subsystems of GSM.
The explanation to this is that Econet can quickly adapt to changes at the component or modular level because they already have expertise such as engineering, supported by business processes that are robust enough to incorporate these changes into the larger dominant technological architecture.
Going back to the duo of questions raised initially, the first question places Econet at a technological crossroads. Asking Econet to adopt CDMA is like asking a house owner to completely destroy their house and start afresh, and asking them to establish abode in a shack while the new house is being built.
As such, it may be practically impossible for Econet to switch to CDMA standards as that would make their current investment in the key pieces of its infrastructure redundant. Adopting CDMA would imply cannibalising their multi-million dollar investment in base stations. Few manufacturers make cellphone handsets that are CDMA-compatible. Switching to CDMA standards would mean that Econet either has to make proprietary handsets or enter into a joint venture with a CDMA-compatible cellphone handset maker.
Thus far, Econet has managed to maintain its leadership when confronted with the so-called technological generations of GSM (2G, 3G and 4G).
Africom cleverly chose a technological path that prevents it from colliding with Econet. Their calculation was probably predicated on the assumption that Econet would be deterred by excessively high exit barriers such as the unavoidable decision to write-off their key assets and brand equity and the possibility of devaluing accumulated GSM-based knowledge assets.
Same price, different business models
Though Econet 's VoIP tariffs are similar to Africom's, their business models and cost profiles are different. On the cost side, though Africom's voice tariffs are similar to Econet's VoIP tariffs, Africom's service is cheaper, the reason being that a VoIP user has an additional internet usage cost.
Africom's CDMA calls do not need an internet connection. Econet appears to be targeting its higher value customers with their VoIP offering. Though they are offering a very competitively-priced product, it is not disruptive. Disruptiveness is not a trait intrinsic to a technology, but how a technology is deployed is what makes it disruptive. By targeting the high-end with VoiP, the technology is sustaining.
In contrast, Africom is deploying its CDMA products in a disruptive manner. They have low-priced mobile phone handsets which work similarly to the GSM mobile handsets. Africom is silently courting lower to mid-tier customers with low-priced voice call on a 'normal' mobile handset.
Thus Africom's low-priced CDMA phones offer higher mobility than Econet's VoIP offerings. However, Africom's CDMA service suffers from limited geographical coverage. Limited geographical coverage is a performance challenge that is restricting Africom's CDMA low-price service from amassing huge customer numbers. Should Africom widen its CDMA geographical coverage while maintaining its low-price points, its value proposition is likely to be too powerful to be resisted by mid and top-tier telecoms customers.
However, why is Africom still a fringe player (in terms of subscribership), given that it has a technological platform that allows it to significantly undercut prices for conventional calls? Investment in network development and upgrading is a capital -intensive exercise.
This, perhaps, accounts for Africom's apparent lightweight status. Perhaps telecoms incumbents know this too, and are not perturbed. Didn't the Biblical Goliath think so too?