Amazon plans to dominate the retail world by using its best product: the e-commerce operation. This product will be accumulating losses even as it takes retail market share from physical stores and malls. The strategy is that over time, Amazon will deliver fatal wounds to many physical stores that few will exist.

But that is just part of the equation. As Amazon bulldozes and dismantles physical stores, more of them will move online. Amazon hopes to provide the platform through its Amazon Web Services for most of these companies. Yes, Amazon has the best solution for these physical stores to operate online, after they have lost any relevance in the physical domain.

Simply, Amazon’s ecommerce operation can make losses, provided that incurring the losses will create new business opportunities for the AWS which will have more customers as offline retails move digital. With this model, it does not really matter if the e-commerce ever makes profit since its impacts are generating businesses for another unit of Amazon.

Amazon has no choice: if it does not pursue its loss-enabling market share against physical stores, they will not move online to require the services of the AWS. (Of course, I am exaggerating here. There are many other areas AWS can make money, including supporting non-retail businesses. But I hope you get the point.) So, there is a big correlation: the more businesses move online, the more potential opportunities for AWS, the cloud services industry leader. It does not matter if the ecommerce makes any money as it causes havoc in the markets.

This Amazon’s strategy is the reason why any African ecommerce company that is copying it will likely struggle.  None has a unit that can deliver this kind of reverse gain that Amazon enjoys with AWS despite its losses in the ecommerce business. Without an equivalent of AWS, any Amazon’s cloning strategy becomes half-baked because the strategy will fail to have the profit-enabling element.

Dangote plans to invest billions of dollars outside Africa to have a geographical diversification.  When you have most of your assets in one region, you open up yourself to risks. Sure, Dangote knows that Africa is not blowing apart, but he does not want to take the risk. Besides, when he does that diversification, most investing models will remove geographical risk as they evaluate his stocks. The end game is possible positive movement of the stocks.

The Dangote Group plans to invest up to $50 billion in U.S. and Europe in coming years, according to Bloomberg.

Africa’s richest man, Aliko Dangote, plans to invest $20 billion to $50 billion in the U.S. and Europe by 2025, in industries including renewable energy and petrochemicals. The 60-year-old Nigerian cement tycoon aims to move into these territories for the first time in 2020 after completing almost $5 billion of agricultural projects and an $11 billion oil refinery in his home country, he said in an interview with Bloomberg Markets Magazine this month.

But diversification goes beyond geography.  Most times, firms build multi-product lines with defenses that deliver assured survival. If Samsung does not have a semiconductor unit, it might have collapsed under the weight of its mobile devices catching fire. But with the semiconductor business, it overcame that problem and returned with record profits.

The same can be said of IBM which saw its hardware business shrank within years. But with its services and consulting, IBM had the opportunity to remain as a business while it worked on fixing anything that was broken. The company continues to find that path, and new businesses anchored on its Watson AI solution will play a major role.

One company that went through the wilderness, lost focus and was internationally beaten down was Sony, the Japanese electronics giant. The camera business was decimated when the world moved from thin film to digital photography, reducing margins. The smartphone unit was an also-ran in the age of iPhone and Samsung Galaxy.  But Sony relied on other products and businesses to remain relevant while it turned itself around.  The revival seems near: products like high-end TV, image sensors, Spiderman, and PlayStation are doing well in markets. The market has responded, pushing the shares to its highest in nine years. From Fortune Newsletter:

As Reuters explains, Sony predicts its profits will mark a peak for the first time since 1998, when its PlayStation first appeared and when its film unit struck gold with Men in Black. Like much of corporate Japan generally, Sony, its home country’s global champion, went into a multi-year tailspin. Sony’s problems were many: brutal competition for its once-dominant television group; being bested by Apple’s iPod, a humiliation for the Walkman pioneer; high-cost manufacturing in Japan; a failure to seize the music-streaming initiative despite years of trying

Sony did many things to get to this level: it restructured the business and redesigned its operations. It also fired many workers in Japan which is not always common. Above all, it refocused by killing many multiple product lines. Today, the revival is evident: “Sony reported a blow-out quarter and said it was on track to post its highest-ever annual operating profit. Its share price has more than doubled in the past three years.”

But most times, you do not even need to be in trouble to redesign a business. Even Samsung Electronics thinks it needs new ideas. It wants a diversified insight into the future of competition.

… the resignation l…of Kwon Oh-hyun, the influential CEO of the semiconductor business of Samsung Electronics. Kwon is 64 and did a couple of unusual things on his way out the door. He stepped down unexpectedly, and he also fired a public warning shot across his own company’s bow, saying the company “needs a new leader more than ever,” given the imprisonment of third-generation scion Jay Y. Lee. Kwon also said: “We are hard-pressed to find new growth areas right now from reading the future trends.” This a shocking admission that even as Samsung racks up impressive profits based on its past innovations, one of its top leaders doesn’t think the company is well positioned for the future.

Offline Diversification

I will be leading a Board strategy session for a client next week. My job is to shape the company’s strategy. In the brief I prepared last week, every Board member called me back: they were interested that I asked them to diversify by going offline in some synergistic ways to the online business. The digital business, from the performance numbers, has been on stasis. I did note that it would be a fatal mistake to give up on the digital-first strategy of the company. While digital-first strategy is sound, digital-only strategy in Africa is really an illusion unless you run a blog or facilitate payments online. To unlock growth, in monetary terms, not just clicks and user base, on time, we need to think beyond digital.

Sure, we will deepen our capabilities in the web, but we will find new markets offline to make money as that is where the money is at the moment in Africa. Digital is for the future, but today, the money is offline. We need that diversification. But we will not leave the web properties. Investment will be smarter but synergies with meatspace must be clearly established. I want atoms to fuse with bytes to provide possible revenue growth.

Also, I am a big believer that meatspace will continue to drive businesses in Africa. For all the talks of leapfrogging, the percentage activity online will be less than 10% of all trade even by 2030. Take a boat to Orom (Akwa Ibom) and explain to me how internet will help you buy crayfish better with no physical access to the market. The infrastructure challenges will keep commerce offline, for long. But yes, the digital ecosystem will grow, nevertheless. The Western world with infrastructure will make a faster digital redesign because infrastructures exist to close the physical elements of trade when they are finalized digitally.

Besides, if the structure of the web is redesigned with technologies like blockchain, most frictions on commerce will disappear. I do believe that most things online will become free in near future and if that happens, making money online will become harder, unless you are running a big platform with advertisers. The British company Circle, a remittance firm, facilitates remittance between U.S. and UK at zero cost. It uses blockchain and Goldman Sacks has invested in it. If that scales, simply, remittance will become free. This same trajectory will apply in other areas.

All Together

As the story of Sony shows, diversification is strategic. While geographical diversification has been moving to other countries and continents, today, it could be as simple as having web and offline businesses. The web is a continent of itself and it is important to understand that. A company that is digital-first could diversify by investing in complementary meatspace business that offers synergy online. For example, an ecommerce firm can invest in a logistics firm as part of business diversification. Your diversification needs the atoms and bytes to be balanced in this age.

Trust is important. I used to watch NEPA (an electricity utilities institution) workers in Nigeria mount high voltage poles to fix or install things. One of the engineers would climb the pole while another would hold the ladder. In that process, they will make sure that power was cut-off to avoid electrocuting the man on the pole. Watching the men, you will see a system that was built and designed on Trust.  Without that trust, the risks the men take would not have been possible.

Trust is not just for electricity workers: in our relationships, we cherish trust. Indeed, in everything we do as humans, trust is the key. The more trust you can build, the better people can believe you. As a young banker in Lagos, they introduced us to Trust Bank. They noted that you would have to keep depositing trust in that bank in order to make progress in your career. Any day you fail in that capacity, it was as good as running away from the banking career. They trained us on decency, honor and values. They pushed us to make sure that our words mean our words, not just to your colleagues but also to the customers.

Even professors have to trust their students. You want to be assured that the papers they have drafted are not plagiarized. If they do and you do not find out, your own career could be in limbo. So, life is really about acquiring, dispensing and managing trust. In commerce, it cuts across all sizes: from big corporations to startups.

The Amazon Trust

You might have read that Amazon, the e-commerce giant, has a smart doorbell. This bell will allow you to open your door remotely for delivery people to drop items you have bought from Amazon. It seems crazy that somebody can do that. What if they hack the solution and someone enters your house? It is electronics and it is IP-controlled which means that it works through the Internet. It is a risk indeed. Yet, people will likely get the device. The technology is not really the bottleneck, the issue is this: can you trust Amazon to have the capacity to make this happen without any level of mayhem. Yes, anyone that deploys this solution in his or her home is simply trusting Amazon. From Fortune newsletter:

Amazon is pursuing something called Amazon Key, which lets its couriers unlock Prime customers’ doors and deliver packages. It’s pairing the service, which it plans to make available in 37 cities next month, with a camera so users will have intelligence inside and outside their homes, presumably boosting trust and lowering creepiness.

If one trusts Amazon, a big if, it’s a pretty cool idea. The company already might be listening to everything my family says via our Echo speaker and its Alexa voice assistant. So it knows what I want, and soon it can deliver it without my having to be home. It reminds me a bit of the Chinese startups that’ll wash your car while you work.

When a company is loved, it can use that grace to open new opportunities. Alibaba, the Chinese ecommerce pioneer, is becoming a global darling. It plans to spend $15 billion over the next three years on R&D in places like Russia, Israel, China, Singapore and U.S. When you hear that an ecommerce firm is spending $15 billion on research and development, you will ask yourself what they are researching on. How people can click faster and spend? The fact is this: Alibaba wants to penetrate markets outside China and wants to build trust by demonstrating that it can deliver the best possible experiences and products. When you spend $15 billion, new partners will come, governments will give you respect, because everyone now understands that you are for excellence. This research will cover ecommerce, logistics and cloud computing, with artificial intelligence (AI), financial technology (fintech) and quantum computing at the heart of the plan.  For cloud computing which Alibaba is pushing aggressively, the imagination that it will spend this much will give many partners more comfort to work with it. It is building trust that a Chinese firm wants to invest in the future.

Besides Alibaba, Microsoft is doing well on cloud which has been a growth area for the firm, helping to boost its earning. Amazon makes most of its profits through the cloud solution named Amazon Web Services. Even companies like Intel that supply the technologies that make building those cloud systems possible have great quarters. So, this is a growth sector. Alibaba wants to come big and now everyone is thinking: what will be the next phase after this $15 billion had been spent. You trust firms better when they invest in R&D. Till today, IBM touts its R&D and patents, reminding you that it puts efforts to get the best technology. It is simply telling you that it wants your trust because it makes the best technology. And once you succeed, the trust level is elevated in the minds of customers.

Your Startup Trust

It is not only Amazon that is testing this weird solution: Walmart is working with NEST, acquired by Google, to test a similar tool. If these companies succeed, it is because customers have built trust around their products. There is no other explanation: you have to trust the brand and the company to put the trust of your safety in their hands. That level of trust is also expected from startups.

First, a startup is just coming up and does not have a history any customer can look back to. So, buying your product will be correlated in the customers’ capacities to believe that you will execute and deliver as you have promised. If you do not put that level of trust, you will struggle on customer acquisition.

Sometimes, founders simply discount their products, making them cheaper to incumbents’ so that even if customers do not trust the products, they can try them without much risk. And of course, when they do try and find that the products are good, the startup can easily upgrade pricing over time. That discount on pricing is actually a way of reducing the burden for the customer to decide to buy: you are lowering the trust barrier where even if the customer does not believe that this product will work, the cost is not that much to not take a risk. So, they take a little risk with you and their experiences will determine how far you will go.

That first experience becomes critical: they are taking many burdens, despite the reduced cost, to give you a chance in the market. If you blow it (the product is crappy), you might have lost them for a very long time. That is why you must be sure that you are ready to hit the market at your best, in terms of product quality and service support.

The biggest challenge you have as a startup at the early phase of your market introduction is trust. You have to lower that benchmark that flips the decision from not-to-buy to buy. Once you do that and then maintain that, you have a customer, not just a consumer, with a relationship that no matter what you throw at the market, most will buy. Amazon is reaping its excellence and tradition of giving customers great deals. It demonstrated that it has the ecosystem where people could buy the most affordable books and other things on America. It continues to mine that trust, utilizing it in many areas. It now plans to make its own sportswear, putting Nike and Adidas on notice. Customers will trust Amazon because it will provide the best price.

The fact is this: when a company has established that high level of trust in the minds of its customers, many good happen: Our social media destination site, Facebook, plans to get into food delivery business. The network has a feature that will make it possible for users to order meals in selected restaurants or through third-party delivery services. Facebook wants you to do more on its platform and it does not even want you to leave to order your lunch. It thinks it has earned your trust in that space. It wants to follow the path of WeChat, a WhatsApp equivalent in China, by building an ecosystem in the lives of people. From Bloomberg: “deals in China are done over WeChat. Bankers in using personal accounts on WeChat and QQ — apps owned by Chinese tech giant Tencent — for everything from distributing research to soliciting orders. The practice is flourishing in the world’s second-largest economy.”

These companies have one thing in common: they have built trust in the lives of the customers and they are simply monetizing it.

All Together

Business is not a vacation enclave. It is a contact game – you hit someone, someone hits you. It is a world of competition. For products you have on the market, success could be correlated to your brand which pushes out an image, defining if people should care on what you do. Building trust and nurturing it is something every startup must work on. When you do that, you build customer loyalty and that always opens moments of glory. For fintech (financial technology) and medtech (medical technology) products, the trust bar is even higher. But the good news is that once the customers have tested you and you are real, they will become fans. Apple in the eyes of its fans will do no harm. Amazon believes that its customers are now pals, giving it access to their homes even when they are not around. You need to have that level of relationship with your customers to succeed at a higher level.

The Nigerian Communications Commission (NCC) has since provided clarity that it has no interest in regulating Over The Top Technology (OTT) solutions like WhatsApp, WeChat and Skype. Prof Umar Garuba Danbatta, NCC’s Executive Vice Chairman (EVC) noted that few days ago, saying that it will “be difficult to regulate OTT”.  An over-the-top (OTT) application “is any app or service that provides a product over the Internet and bypasses traditional distribution” channels like the ones offered by telecom companies.

Prof Umar Garuba Danbatta, NCC’s Executive Vice Chairman (EVC) disclosed this information on 19 of October 2017 when a delegation from the United States (US) embassy paid a working visit to the commission’s headquarters in Abuja.

According to him, though NCC understands the operators’ “plight” the truth is that there is nothing we can do for now.

The NCC EVC, said he had interacted with heads of telecom industry’s regulatory agencies in the US and some other advanced economies and he was indirectly told that OTT couldn’t be regulated for now.

[…]

“We want investors to come and invest in telecoms infrastructure across the country. I believe they will make their money in no time. Our investment environment is becoming friendlier, our security has improved greatly and the Federal Government had promised some number of incentives for would-be investors.”

 

Largely, this statement is just a confirmation of what many people had expected: NCC lacks the technical capacity and also the legal frameworks to do such. Nigerian people can sue it if it blesses the practice in the industry. While the people are using the WhatsApp, the users have already paid a fee to connect to the Internet in order to have the capacity to use WhatsApp. What the telcos need, in my opinion, is to explore new business models that will move into monthly plan. They have the customer identities and can practically work together to ensure that a monthly plan business works. Once the customers are moved from pay-as-you-go to monthly plans, relying on the data of customers they have, the issue of OTT will be lightly managed. If they offer usage data tiers, people can subscribe to what works for them, monthly.

The Transition to 5G Era

In the next few years, most global telecom operators will begin the transition from 4G to 5G. It is going to be a challenging period for telcos in Africa if they do not find new revenue sources. Yes, we will expect the migration to 5G but without the funds, nothing will happen in Africa. In a way, you have to pity these companies for providing dump pipelines upon which aggregators like Facebook, WhatsApp and WeChat feed upon, without any compensation. Unfortunately, that is the structure of the web. From Fortune Newsletter:

…. Most of them are in the telecoms equipment business. Nokia’s shares fell 15% Thursday after it warned of a wider-than-expected loss this year and said 2018 could be just as miserable. Last week, Ericsson had reported its fourth straight quarterly loss. Mobile carriers have simply stopped spending until it’s time to upgrade to the 5G standard.

I do not see how Nigerian telcos can participate in financing the 5G without capital. MTN will be dealing with fines imposed on it for the SIM card registration over the next few years. Airtel is really challenged in Nigeria as market shows in India. Glo is not making money that much either while 9Mobile is loaded with debts. So, the 5G era may be long before it comes to Nigeria.

What Telcos Can do

The available options to raise capital for 5G are not easy. I will list some of them here:

• Diversification of Revenue: MTN has been leading in startup investment with its partnership with Germany-based Rocket Internet, the owner of Jumia. MTN invested massively in this business. The problem is that Jumia is not going to make so much profit that will reward MTN with dividend to fund 5G. Kenya’s Safaricom is turning itself into many things: from ecommerce company to taxi app. But Safaricom is unique: it is part of the Kenyan government with the control of MPESA. So, it can do many things which other players in most markets cannot do. I am not sure anyone could have gotten the go-ahead on MPESA if not for the government’s interest in the telecom giant. Nevertheless, even if you build these operations, you need to burn capital to win. The profit will not come fast enough to help in financing 5G network.
• Ask OTT Players to Pay: There is also an option to ask Facebook which owns WhatsApp to pay the telcos. But this does not make sense. Facebook, if NCC supports such an idea, will simply make WhatsApp not available in Nigeria. Nigeria is not such a critical country to bully Facebook in this way. They will just go instead of having to pay. Google did a similar thing with newspaper companies in a European country and exited its Google News when the regulation became very difficult. Of course, when Google left, the newspapers saw massive drop in traffic and went and begged Google to return.
• List in Nigerian Stock Exchange: That is a reasonable path. My suggestion will be for them to dual list in Johannesburg Stock Exchange even as they list in Lagos. That will help the telcos raise capital.
• Private investment: Very tough because if the revenue stream is dropping, due to technology disruption, raising private capital will be more challenging. So, for this to work, the business will be restructured with a business model that shows paths to profitability.

All Together

It will be challenging to have the capacity to raise new funds when your main product is under threat from many angles. The telcos have one clear path to fixing this problem: concatenate all the biometric data they have and quickly use that data to unveil monthly-plan only products in Nigeria. Then make sure there are many options in the monthly plans, structured by data size, for Nigerians to subscribe based on their needs. Once you do that, it is irrelevant whether they are using WhatsApp or Skype in the platforms. At least, they will pay monthly fees to have access to the web to do the WhatsApp or Skye.

The technology industry is very challenging and it is unforgiving: Apple was rumored to have fired an engineer whose daughter posted a video of his iPhone X in YouTube. That shows you that no one wants to lag behind. Apple likes the aura of expectation that comes with its products, even as people paying now for iPhone X can only wait for extra 6 weeks to have the product. So, in this business, there is nothing like forgiveness as everyone wants to win. The telcos need to have that mindset because Silicon Valley will not send them any help: they will continue their global domination. Only novel business models can provide paths for local firms to win. The telcos can do that if they innovate.