FRAMINGHAM, Mass. -- The first SMS-capable mobile phones were approved for sale in Europe 20 years ago this month. By any measure, SMS has become a huge success, at least for the telephone companies, with more than 6 trillion SMS messages sent worldwide in 2010, generating more than US$110 billion in revenue. But the future may not be anywhere near as bright because of increasing use of "free" Internet-based services such as Facebook, Apple's iMessage and whatsapp.com.
SMS is a great deal for telephone companies. It costs almost nothing to transport an SMS message, yet the global average price for a message is 11 cents. Verizon Wireless lists its price as 40 cents (20 cents for you to send a message and 20 cents for your friend to receive the same message. All prices US). 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 costs almost nothing to provide very low indeed.
It is not quite as exploitive as it might appear since 60 per cent or so of U.S. 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.
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 people who actually do want to save money. WhatsApp and, separately, Apple's iMessage are examples. They also demonstrate the advantages and limitations of this approach. The biggest advantage is that they 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 dropped 28 per cent in the first quarter of 2012 because of users switching to Internet-based messaging services in order to save money.
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.