SMS a killer app at 20; irrelevant at 25?

By Scott Bradner

The first SMS-capable mobile phones were approved for sale in Europe twenty years go this month. By any measure, SMS has become a huge success, at least for the telephone companies, with over 6 trillion SMS messages sent world-wide in 2010, generating over $110 B in revenue. But the future may not be anywhere near as bright because of the increasing use of "free" Internet-based services such as Facebook, Apple's iMessage and WhatsApp.com.

SMS is a great deal for the telephone companies. It costs almost nothing to transport a SMS message yet the global average price for a message is 11 cents -- Verizon lists its price as 40 cents (20 cents for you sending a message and 20 cents for your friend receiving the same message). (http://support.verizonwireless.com/terms/txt_messaging.html) And this is essentially pure profit. A great deal for the telephone carriers and an example of the lack of real competition since real competition would drive the price of a service that cost almost nothing to provide very low indeed.

It is not quite as exploitive as it might appear since 60% or so of US wireless customers now have flat rate, and frequently unlimited, SMS packages as part of their wireless contracts rather than paying per message. Some carriers, such as Verizon, have been limiting their low cost and limited SMS service offerings thus raising the basic revenue they can expect from the average customer. (http://www.phonearena.com/news/AT-T-to-restructure-its-texting-plans-leaving-unlimited-texting-only-come-August-21st_id21317)

But the relentless march of technology is beginning to impact this stream of money. More and more smartphone owners are using social media sites such as Facebook to communicate with their friends instead of SMS. Some are doing so to save money since there is no per-message charge for updating your Facebook page. But most are likely making the switch because they already use Facebook as their primary way to let their friends know what is going on.

There is a new class of application directed at the people that actually do want to save money. Apple's iMessage (http://www.apple.com/iphone/built-in-apps/messages.html) and WhatsApp (http://www.whatsapp.com/) are examples of these applications. They also demonstrate the advantages and limitations of this approach. The biggest advantage is that they are over the top (OTT) services that ride on top of the smartphone Internet data service and are not charged on a per message basis. The biggest limitation is that the vendors have not yet adopted a common standard so you can only send messages to people who have the same application.

It is fundamentally irrational to have a per-message charge for an internet-based service - very advantageous for a carrier that could get away with it, but technically irrational in a network such as the Internet where the incremental cost of an additional packet is infinitesimally small.

This irrationality is already catching up to some telephone carriers. For example, Swisscom's SMS revenue has dropped 28% in the first quarter of 2012 because of users switching to Internet-based messaging services in order to save money. (http://www.prepaidmvno.com/2012/05/01/swisscom-sms-revenue-falls-28-in-face-of-ip-substitution-interim-report-jan-mar12/)

The use of flat rate unlimited SMS plans are likely to delay the inevitable for a while but, even with such plans, why spend $240 per year (for Verizon) to use a function that is enabled for no extra cost by your basic data plan and will never generate enough traffic to kick you into a higher data bracket? SMS fees will soon be just another tax on the clueless and the telephone company's only hope is that the clueless don't talk to the cluefull.

disclaimer: Harvard likes to think that it is a place where the cluefull talk with the cluefull, if that is true then the above would not apply, thus please assume that the above exploration into telephone company irrationality is my own.