I tried to dig a little deeper about Twilio and their competitive position against Amazon. I found this link with a very interesting panel discussion of industry insiders:
There wasn’t much about Twilio vs. Amazon actually but I was very intrigued by the video about “Pure Consumption Pricing”. As most of you know Twilio is using a consumption pricing model. In the video (around minute 6) it’s pointed out that the consumption pricing model is very interesting for certain segments of the market. Earlier (around minute 3), one speaker also states that he doesn’t see a big gap between traditional pricing (monthly fixed fee per seat usually) and the consumption pricing model. They also say that basically, the consumption pricing model wasn’t possible before the cloud.
It also gets mentioned that the consumption pricing model will put pressure on seat prices. Both Twilio and Amazon have a lot of money and could subsidize their products to push competitors out of the market. It is not clear from the outside what their break-even prices are, but probably lower than most. If smaller companies would be forced to match those prices that would mean real hardship.
Then they also go further into margins: Cloud contact center providers have very low gross margins, one speaker states. There is tension regarding the resale of telecom minutes. There also seems to be a tendency for some companies to start with Twilio and then bring their own telecom (minute 8:40; as I understood, Twilio would get bypassed in this case because they are the middleman). 30% of the cloud contact center provider’s revenues are resold telecom minutes.
I tried to transcribe one statement regarding Twilio (around 10:24) because I thought it was very important:
“This is a key issue for Twilio. They are not profitable yet. They have pretty low gross margins. They are a broker basically. They offset this because they have very very low sales and marketing costs. But as they move to the enterprise they are starting to bring higher marketing and sales cost that they could offset with the model. So, even if they grow and get economies of scale there will be continued tension. And I don’t think we can consider that telecom has no impact from pricing. So I think it’s going to impact a lot the structure of the offerings as we move forward.”
Now, this statement is seriously questioning Twilio’s ability to be profitable in the future and as I understand it also implies that telecoms do have considerable leverage on them. That seems like a big risk. My takeaway is to watch gross margins very closely, especially now that they will integrate SendGrid, which has higher gross margins. It will be important to check that they don’t hide declining margins of the core business through the SendGrid acquisition. I will also look closer into sales and marketing costs in the future.
The video ends on a positive note, though. Around minute 12 Dave Michels makes the point that pricing considerations are given too much importance in the discussion. In the end, what customers will look for is the level of capabilities a solution can bring. Omni-channel capability will be very important.
Overall takeaway: A bit mixed. If the level of capabilities is the most important factor – which I think it is because of the growth rates we are seeing – Twilio should continue to be very successful in terms of market share and revenue growth. Also, they probably have some advantage in terms of unit economics (so does Amazon), so they might be able to charge overall lower prices through their consumption-based pricing model which will put even more pressure on the competition. But that doesn’t mean necessarily that they will be very profitable, too. I’m not too worried at the moment because gross margins are stable and Twilio is simply investing a lot in growth which seems to be the right move. For me, the remaining open question is how will telecoms impact their profitability down the line? Do telecoms have any incentive to squeeze Twilio? Or could Twilio become independent from telecoms (for example through an acquisition)? Any insights?