SMS - The Little Engine That Keeps Driving the Mobile Industry

Implications: The argument that SMS pricing is not linked to cost has always been true.  There will come a point where SMS pricing is more elastic (either because the price becomes too high or there are messaging alternatives), but we have not reached that point yet.

Analysis: Text messages, or technically SMS (Short Messaging Service), are 160-character (maximum) messages that mobile users have (almost) all come to love.  SMS makes up the majority of the estimated 300 billion mobile messages that will be sent in the US and the estimated 2.3 trillion messages to be sent globally in 2008.  That averages to over two messages sent per subscriber per day.  

SMS is hugely profitable as it costs virtually nothing to deliver (certainly within the same operator’s network), especially considering that the core SMS infrastructure has been in place for years.  SMS was the mobile industry’s growth driver and savior for nearly a decade.  Those little 160-character messages in many cases account for over 10% of a mobile operator’s service revenue - at nearly 100% profit margin, and were responsible for much of the revenue and data revenue growth over the last 10 years.  The idea that SMS pricing is unlinked to cost is true at 10 cents or 20 cents per message but users seem willing to pay.

In the backdrop of a slowing economic growth, leading US mobile operators (AT&T, Verizon Sprint, T-Mobile) as well as European operators have increased SMS prices, especially for non-bucket and overage messages.  Mobile operators are squeezed on voice revenue and subsidies, and are looking toward SMS - which is hugely popular and currently has no substitute - as a vehicle for continued revenue growth.  With networking and IP-based solutions such as mobile Instant Messaging (IM) and social network communication, SMS could come under attack, but so far SMS or “the little engine that could” keeps chugging along.

Until viable messaging alternatives come to market (or regulators intervene), SMS will continue to be a steady revenue source for mobile operators, and subject to price increases.