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Twilio paid $800 Million to acquire ZipWhip. At 10x revenue, the valuation was high for the asset. As deals go, it wasn’t the biggest in Software but one of the biggest in the Messaging industry. While surprised by the price tag, industry insiders knew why Twilio had to buy ZipWhip.
Interoperability and The Direct Bind
Connectivity is at the core of interoperability. In messaging, this connection is ‘the bind.’ A technical term for the point in message flow where both networks connect, a bind is the single most irreplaceable asset in messaging.
An example of cooperative interoperability, the direct bind is reserved for the ICVs and the aggregators who charge their fees for being intermediaries. In messaging, you can’t get rid of the ICV or the aggregator unless the carriers approve. Everyone else has to go through them to send their messages. Carriers’ fees reflect this reality with no volume discounts in the pricing model. Any hope for deals comes from squeezing the aggregator or the ICV, which also has its limits.
There comes a time when it pays to get rid of the intermediary. When you’re Twilio doing over 12 billion messages a month, the intermediary can add substantial costs to your bottom line.
Twilio by the Numbers
Twilio is a growth engine. Since 2013, it has grown at least 40% YoY. It has never gone below 48% in gross margins and never sequentially grown less than 4.8% each quarter.
It has high revenue, high margins, and high growth making it not only a standard-bearer in the messaging space but also in the software industry.
What Makes Twilio Special
It’s not like what Twilio offered in 2007 didn’t exist before. Bandwidth.com was Twilio before Twilio was Twilio. CallFire was founded a year before Twilio and had more significant revenues. When it came to SMS messaging and number provisioning, Bandwidth.com had perhaps the best API. I attested to this as Bandwidth’s IPO reference client.
What made Twilio stand out was its relentlessness. Jeff Lawson’s vision is to make messaging simple for the software developer. A developer himself, he had first-hand experience of the obfuscation of access that the carriers create when providing gateways to out-of-network communication.
Twilio promises quick network access regardless of whether you are a developer in Sydney, Shanghai, or San Francisco and regardless of message destination. Its mission is to make access to the telecom network fast, easy, simple.
Serving this relentless vision is the ruthless pursuit of operational leverage. Not only did Twilio have an excellent product for the developer, but they also made their pricing competitive and straightforward. Any developer could start an app by paying pennies on the dollar. There were no plans to commit. You just paid as you went. Not only that, you didn’t need to give a work email address to sign up. Twilio is unwavering in this promise.
The operational leverage that the scale brought you meant you could provide products at the lowest prices. Pricing that you would not have unless you were an insider or a wholesaler that knew the movers and shakers in the world and the secret handshakes they used.
So, when trying to figure out what Twilio’s up to, understand that it is driven by one thing alone: Building messaging solutions that the developer will love.
Finally
The developer is notoriously impatient. They’re too busy building what they’re building to be bothered with the complexities of the always-on dial tone network that everyone has come to expect.
In the face of this expectation, Short Codes were inaccessible to the everyday developer with its uncertain and vague approval process. So Twilio went for long code-first development via tier-1 ICVs like Syniverse and SAP and used them to get access to messaging quickly and at scale. When these developers got successful, many messages went from Long Codes via ICVs.
As the developers got more successful, the volume of these Long Code based messages snowballed, fueled by the many new apps they were building.
When Carriers caught on to this, Twilio, flush with cash, emboldened by scale, and a loyal and large customer base, used its influence to push the Carriers onto the back foot.
Next
In the next installment, we’ll see how Twilio went from practicing indifferent interoperability to outright adversarial even though it never wanted to be a Carrier. We’ll see how this shift laid the groundwork for its ZipWhip acquisition.
Author’s Note: This is the third installment on interoperability. Links to the entire series: I, II, III, IV, V, VI