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In 2016—the year it went IPO—Twilio had 36,000 customers paying it $270M to transmit messages. This was an eight-fold increase in revenue and a three-fold increase in customers in just five years. None of this would help it win the treasured direct connection to the carrier.
The Viral Effect Twilio Created
Twilio’s success showed a new breed of innovators that high revenue, high margins, and high growth could exist in the messaging industry. Before then, you could have two of the three but rarely have them all.
Thanks to Twilio, everyone started courting the developer, vying for their business, and vouching for their applications.
This increased the A2P traffic that carriers were getting and the many use cases these developer tools spawned. The carriers themselves couldn’t handle the volume of requests for provisioning and exceptions.
Shortcodes continued to be inaccessible to the everyday developer with their uncertain and vague approval process and high costs. A shortcode for example, costs $500/month, whereas developers could get a long code for pennies. Most developers went for the false certainty of long code first development. When those developers got successful, SMS messages flooded the long code channel.
With the high volume of good messages came many unwanted messages. And this brought on blocking, throttling, and prioritization by the wireless carriers. Unknown traffic was tagged as unwanted and routinely blocked without warning. Issues like Remind me getting blocked without escalation were becoming more common.
Twilio and others were selling a product that the carriers were not offering. This broke every cooperative and indifferent interoperability role and made everyone offering such functionality adversarial to the carrier that owned the network.
The Limits of Size
SMS is an asymmetric market. More volume doesn’t get you better rates because the carrier decides the floor. They have absolute control over pricing, access to their customer, device, and network.
Any semblance of operational leverage comes from the many intermediaries between you and the wireless provider. In other words, how close are you to the radio tower?
There comes a time when you exhaust all possible ways to get the best deal from the intermediary. In Twilio’s case, it was either the Aggregator or the ICV. Yet, even with Twilio being the largest sender of messages over long codes, the carriers still refused to connect. Unhappy with the way Twilio had pushed the interoperability boundaries around traditional A2P, the carriers would never grant it a direct connection.
Poking 800 lb Gorillas
Unless you’re a legislator or a regulator, rare are the times you will win a staring contest with a carrier. They own the infrastructure, the access to the wireless device, and the treasured relationship with the subscriber. Yet Twilio built a multi-billion dollar business on providing unfettered access to the networks and the mobile devices attached to it.
In a world of campaigns requiring Word documents and weeks to provision, it used the indifferent approach that carriers took to A2P messages coming over the P2P channels to make real-time provisioning available.
Before Twilio, no one had tested the A2P channel at scale. It brought more use cases to the A2P channels, which pushed the carriers’ processes around provisioning and policing. As such, identification and escalation of issues that seemed OK just a few years before were no longer tenable.
Unable to capitalize on their growing size to build better relationships, Twilio found themselves faltering on their promise to the developer. This was when Twilio went from being indifferent to adversarial. They decided to bring in the regulator.
The Title II Fight
In the US, FCC regulates communication. They get this power from the Telecommunications Act of 1934. It has eight sections or titles that deal with all aspects of communication. Title I defines a telecommunications service. Title II deals with broadcast services (also called common carriage). Titles III through VII deal with multiple matters, from not using radio waves for obscenity, violence, or sedition to how cable internet should work.
Voice is considered a utility and hence a Title II service. A Title II service is immune from blocking, throttling, or prioritization by the carriers for commercial reasons. A Title I service is an information service offered by the carrier, who can then decide rules for pricing and access. SMS is a Title I service.
Unable to get a direct bind, Twilio petitioned the FCC for SMS to be classified as a Title II service. If they couldn’t have a fruitful conversation with the carriers, they would ask the regulator to change the rules for interoperability. Full disclosure, as COO, I led EZ Texting’s efforts to grant the petition. While not as big a player as Twilio, we too were seeing the effects of the blocking. There is nothing new to say that’s not already been said. However, I will talk a little about political advocacy.
Advocacy is a knife fight where the moderate opinion is the first casualty. This is true for any polarizing topic. Brilliant people on either side make well-reasoned arguments and ruthlessly drive their point. If the petitioner asks for more, less, or no regulation, question why.
For the carriers, the downside of being handed a de-facto monopoly over wireless networks is that regulators will always be poking under the hood to ensure equitable access and fair business practices. They always want less regulation or at least no change.
Startups are notoriously averse to dealing with law and regulators. The question is, what was inherently broken that forced Twilio to go to the regulators?
Filing the Title II petition was like punching an 800 lb gorilla in the face. While the carriers planned a response, for good and bad, Twilio became untouchable. It used this detente to grow even faster, wherein they became too big to shut down.
Twilio put itself in a win-win position. If its traffic got blocked, it had an example for the FCC. If no traffic got blocked, they had satisfied customers. The business didn’t care about the regulatory treatment of SMS. It just wanted messaging to function.
The carriers cared much more about avoiding the regulation than blocking the traffic. They could showcase Twilio’s success as the reason why the regulation wasn’t needed.
Soon it wouldn’t matter which way the FCC would rule on the petition.
Twilio procured better relationships with the carriers in the years following, but this is an industry that doesn’t forget. The carriers never forgot (or forgave) what Twilio did and refused the gold prize of direct binds.
The Network Consolidation Flywheel
Consolidation provides the clean-up of the mess that innovation creates. The pandemic accelerated this consolidation. Twilio’s competitors felt the same pressures and acted more aggressively than Twilio. Sinch acquired SAP, one of the two tier-1 ICVs. Infobip acquired OpenMarket, one of the three Short Code providers directly connected to all carriers (AT&T, T-Mobile, and Verizon).
In a market strife with channel conflicts, your competitors not only had instant access to your book of business, they could also squeeze your operating margins. This is not a place to make your bed.
Finally
Twilio’s success is as much an interoperability story as it is a product story. They started in the indifferent interoperability camp. The carriers didn’t care until they did, and when they did, the situation became adversarial. This even though Twilio never wanted to erect radio towers or sell iPhones. The collective capacity of Twilio’s customers to innovate outpaced the carriers’ ability to keep up. In the same vein, Twilio failed to build meaningful relationships that would allow it to work more cooperatively with the carriers. It would take the threat of regulation for all parties to finally talk.
Next
In the final installment, we’ll talk about ZipWhip, and how it managed to leverage cooperative interoperability from the carriers to disrupt SMS distribution channels. And how that made it the only way Twilio could get its direct connection.
Author’s Note: This is the fourth installment on interoperability. Links to the entire series: I, II, III, IV, V, VI