Smart Pipes or Dumb Monsters: What Can Telcos Do About Death of SMS?

Teen TextingOTT messaging overtook and exceeded the number of text messages sent in the UK last year by more than 15bn.

According to Deloitte estimates, the number of instant messages sent in the UK reached 160bn in 2013, growing from 57m in 2012. Meanwhile, the number of text messages sent dropped from 152bn in 2012 to 145bn in 2013.

This represents the first time that the number of texts sent has dropped. In 2014, the company believes that more than 300bn IMs will be sent, compared to just 140bn SMS.

But, in spite of the impressive growth of OTT messaging, with a growing range of global contenders, SMS still represents a huge share of revenue. In 2014, it will generate revenues of £60bn, equivalent to 50 times IM revenue. And Deloitte says it expects text messaging to continue to generate significantly greater revenues until 2018.

Scott McKenzie, director of Coleago Consulting, which advises the telco industry said he is surprised that SMS revenues aren’t going to fall faster than this. He now believes that the market has to aggressively go after mobile data if it wants to survive, to embrace that they’re going to be a ‘smart pipe’.

“The telcos are just becoming broadband internet companies,” he said. “SMS has been a highly lucrative area for them with a high margin, so they’re going to have to figure out how to profitably deliver mobile broadband to everybody. If they don’t cannibalise their own revenue, someone else will do it for them.”

But Jose Romero, VP product strategy and marketing at Movius, which sells new services to the carriers, believes that if this happens, telcos are restricting the kinds of services they can charge for and are likely to succeeded by smaller, cheaper mobile internet providers. He says they have to innovate.

“Some of these companies are in desperate situation where their business is starting to tank and if they don’t do something now – they will lose their business – specifically in developed markets,” he said. “They are hurting really, really bad from the loss of SMS revenue but they are quickly becoming an internet pipe that doesn’t generate much money.”

He says the large telcos need to speed up decision-making, stop doing me too innovation and not be afraid to be first to market. “Carriers can actually compete in the area that they are very strong at – innovative voice services with high reliability – there is still a lot more money to be made from existing voice infrastructure so why don’t they do that?” he said.

Options that telcos are already exploring include offering different user profiles for work and home phone use on a single handset, and creating better roaming offers so people arent afraid to use talk minutes abroad. But Romero also highlights that Google now offers its users the opportunity to choose their default messaging client when they buy a new phone – picking either their carrier or an OTT provider – and this could easily be offered for voice too.

“If the carriers don’t innovate in the next two to three years, the OTT players will take over,” he said.
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“If the carriers don’t innovate in the next two to three years, the OTT players will take over,” he said.
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These companies can even go into other areas that they’re not comfortable with – theyve got to look for new ways to become relevant or they will lose market share.” He points to AT&Ts presence at CES, tackling areas as broad as connected cars and healthcare.

But both men agree that telcos shouldnt try and beat OTT providers at messaging. “Their experience of delivery of apps is pretty woeful,” said McKenzie, ” and there are millions of great apps out there already. But these messaging apps don’t actually generate a massive amount of revenue. And apps can change, WhatsApp could be replaced by something tomorrow.”

Both hightlight the failure of telco JV Joyne, a rich messaging app aimed at taking out the OTT market. “The project was five years late because they couldn’t agree on standard and took forever to get the thing off ground,” McKenzie said.

Understanding consumer behaviour to assess individuals needs, as well as offering good value packages and different levels of service for different types of customer, is key, he says. “Its in their interests to have efficient customer service, which lower costs and reduce churn rates. The mobile market is going to get a lot more competitive in the UK.” Some companies are already adjusting pricing to make OTT less attractive, he highlighted, while T-Mobile in the US hosted an uncarrier event at CES last week in a bid to differentiate itself.

McKenzie believes that in-market consolidation ‘makes a lot of sense’ and it has already been done across the world. But competition authorities are increasingly wary of the negative effect this may have on consumers. Private equity firms, outside operators and investors from Asia were also identified as potential entrants into the UK telco market.

But Romero doesnt like consolidation, saying this could perpetuate the problems telcos already have. “It is something that is going to happen very quickly here. But it’s just going to create these monster operators and again – if they don’t innovate – they just become a pipe.”