Mobile Carriers Don't Want To Give Up SMS Without A Fight

from the what-a-racket dept

Apparently there was some tension at the Mobile World Congress—the world's largest mobile phone trade show—as the growing battle over text messaging took center stage. As you may know, SMS text-messaging is a rip-off, and a huge cash-cow for the mobile telecoms, who charge premium rates for a service that has an effective cost of zero (SMS messages are encoded into regular signals that cell towers have to send anyway). But they are losing a growing chunk of that income to data-based messaging services like BBM, iMessage, WhatsApp, Facebook Messenger and more. Naturally, they aren't happy, and they try to frame it as an unfair disruption of their business model:

Needless to say, mobile companies are not happy at the flood of free messaging services piggybacking on their networks. Telecom Italia chief executive Franco Bernabe told MWC that free messaging services are undercutting the ability of phone companies to invest in their networks. Paid texting, or SMS, has been a cash cow for phone companies which uses minimal network capacity.

The new players "have based their innovation in the mobile domain, without a deep understanding of the complex technical environment of our industry. This is increasingly creating significant problems to the overall service offered to the end user and driving additional investments for mobile operators," Bernabe said.

None of that makes a lick of sense. Bernabe is basically saying that everyone else has a responsibility to not build data apps that compete with telecom services, but unfortunately for him that's not how free markets work. Rather than seeing the huge opportunity that is the growing demand for wireless data access, the telecoms have decided to focus on the one thing that has stopped SMS from being completely replaced already: the lack of a single standard alternative. GMSA, a mobile industry group, has built a new cross-platform messaging service that they hope to get pre-installed on all cellphones and have become the standard for all text, photo and video messaging—though they haven't announced how much they plan to charge for the service. They claim that nine out of ten major device makers have signed up, with all eyes falling on Apple as the probable holdout: Apple is on a crusade to kill SMS messaging, and they likely would have succeeded by now if they weren't committed to their own walled-garden approach that pushes everyone towards iOS.

Of course, the same conference was also attended by the companies that have the telecoms so frightened. Joe Stipher, co-founder of messaging service Pinger, had a wiser perspective on the direction things are headed:

"Text messaging is free, and calling is going to be free," said Stipher, wearing jeans that contrasted with the dark suits favoured by thousands of mobile phone company executives attending the four-day 2012 Mobile World Congress that ended Thursday. "Data is going to be like electricity or water, not totally free, but do you worry about giving someone a glass of water at your home or letting them plug in? No."

I actually think that could be slightly better worded: in the future, there will be no more distinctions like "text" and "voice". Everything is just data anyway. But Stipher is absolutely right that bandwidth is becoming a generic utility, and that's something the telecoms have to accept. For some reason, they are terrified of becoming "dumb pipes"—they want to be "smart pipes" that charge premiums for different "kinds" of data, even though that's basically an imaginary concept. It's an odd attitude, because being a dumb pipe for something that everybody wants is a pretty good position, and if you accept it then you stand to make more money by letting people build whatever they want on top of what you provide. Truly, this would be the smart thing for a pipe to do, and Stipher has some fun with this by co-opting the term for himself. The carriers play along, using their own definition, and what results is an amusing portrayal of the mental disconnect that exists:

[Stipher] explained that "The carriers should be smart, reliable pipes" providing internet data access like utilities give reliable water and electricity, he said. "They need to focus on being good network operators."

[Rene] Obermann [chief executive of Germany's Deutsche Telekom] said carriers are at a crucial point at which they must "develop our own, innovative product suites" through cooperation with the smaller messaging companies. "The smart pipe will be one of the areas where (telecommunications companies) will show their innovation," he said.

Of course, Obermann's own company has a venture capital division that invested $7.5-million in Pinger, so maybe on some level he knows which way the winds are turning.

Filed Under: competition, data, smart pipes, sms, text messaging

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  1. identicon
    Doug, 2 Mar 2012 @ 1:27pm

    Not quite free

    Just to clear up a misconception, SMS is not entirely free. The bandwidth used by SMS is free, but it is non-trivial and non-free for the carriers to store the SMS until it can be delivered and to manage routing the information to your phone. And they aren't overcharging -- they're charging what the market will bear, which is exactly what free market economics says they should charge.

    Now that the technical part is done, on to my regularly scheduled rant.

    SMS messaging has been a cash cow for them, since they can charge far more than it costs to implement the service. To give the carriers the benefit of the doubt, I must admit that it is possible that some of their SMS profits may have been invested into expanding the network, and perhaps the profits from SMS were used to allow them to keep the prices low on other services.

    That said, they seem be making one of the classic blunders, which is to assume that a cash cow will live forever. That is perfectly contrary to the laws of the free market. In a free market, any highly profitable scheme will attract competition. That's how today's luxury becomes tomorrow's commodity and next week's trash. A box of Cinnamon was once unobtainable, then superbly expensive, then expensive, and now cheap.

    Cell service will inevitably become a commodity, and finally will be superceded by the next great thing. The only question is how long it will take. Eventually your cellular service bill will look like this:

    1. Monthly service and regulatory fees: $8.00
    2. High priority data: 264MB x $.05: $13.20
    3. Bulk data: 4234 x $.005: $21.17
    4. Monthly phone service: $3.00
    5. Equipment payment: $8.00
    6. Phone-based purchases: $34.23

    So they charge a standard monthly fee for account maintenance. High-priority data (phone calls or real-time video games) is charged at a higher rate than bulk data (web browsing, Netflix). Phone service (i.e. the phone number) is an optional part of the package, and may even be provided by a separate company (e.g. Skype, Google Voice, or Vonage). If you buy a phone from the carrier, you can pay up front or be charged a monthly fee to pay them back for it (again, optional). And finally, you can bill things to your cellular account if you want, and that will show up on the cellular service bill.

    (Ideally, they cell carriers will also share towers and spectrum as a kind of co-op or joint venture, though I can't be certain of that ever happening. The current redundancy of service and waste of spectrum is ugly, but the carriers don't seem to want to work together to reduce costs since it would also even the playing field and force them to compete on costs instead of competing on coverage and lock-in.)

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