Text messaging has been something of a cash cow for cellular carriers — basically as close to pure profit as you’re going to find in a product.
Now, though, use is on the decline. CNET recently reported that in Q3, SMS text message volume declined for the first time ever — and that text message revenue fell right along with it. This could be bad news for carriers — but stems from their greed to begin with.
An Overpriced Service
SMS text messaging (short message service) is a standard used by mobile carriers to transmit messages up to 160 characters. If a user goes over 160 characters, a second text message is sent. The service is extremely low-bandwidth. Estimates put the retail cost to carriers for delivering a text at somewhere in the neighborhood of 1/1000 of a cent if users were paying for the data used.
Carriers charge a whole lot more than that for texting, though. The rates have brought complaints from customers and scrutiny from government officials.
In 2008, for example, Verizon (NYSE:VZ), AT&T (NYSE:T) , Sprint (NYSE:S) and T-Mobile were questioned by Senator Herb Kohl about increasing prices. The price went from 10 cents in 2005 to 20 cents in 2008 — a year when the number of text messages sent in the U.S. hit 2.5 trillion. Class action lawsuits have also been filed, accusing carriers of price fixing.
Carriers say that few customers send text messages on a pay-per-use basis, so they don’t pay the full price. Most choose a plan that adds unlimited text messaging for a small fee, which can bring the cost for heavy users down to pennies per text.
The problem with that argument, from a consumer perspective, is that even at one cent per text, Sprint is still charging an astronomical markup. Plus, arguments that carriers need to charge more so they can cover operating costs are highly suspect since those text messages are transmitted over a control channel on the wireless network. That channel is required anyways and, because the texts are so tiny, volume has no impact on that channel’s bandwidth.
Now, though, alternative services — called IP messaging — like Apple’s (NASDAQ:AAPL) iMessage or Research in Motion’s (NASDAQ:RIMM) BlackBerry Messenger have become increasingly popular. And they’re are much cheaper for consumers.
Let me share a personal experience. Being from Canada, I use Canadian carrier Telus. I frequently cross the border into the U.S. for day trips and usually use texting to stay in touch. My carrier charges 60 cents per text message in the U.S., and $3 per MB of data. With those rates, sending a text costs 60 cents. Using iMessage on my iPhone, it only costs me roughly one third of a cent to send the same message — even with that high U.S. data rate.
Most of my contacts use iPhones as well, so do you think we’re texting anymore? No way. It’s iMessage all the way, unless there’s no other choice. I could care less if I can add unlimited texting to my plan for $10 when I can now essentially get the service for free.
Clearly, I am not alone in having had enough of carrier text gouging. As pointed out in that CNET article, IP messaging and messaging incorporated in products like Facebook (NASDAQ:FB) and Twitter are all eating into SMS texting’s market. Android smartphones have their own IP messaging app as well, plus there are multi-platform options like Microsft’s (NASDAQ:MSFT) Skype.
Trouble Down the Line
If the trend continues, the decline of SMS texting means trouble for wireless carriers. AT&T CEO Randall Stephenson expressed this at a conference recently, saying:
“You lie awake at night worrying about what is that which will disrupt your business model. Apple iMessage is a classic example. If you’re using iMessage, you’re not using one of our messaging services, right? That’s disruptive to our messaging revenue stream.”
See, texting is the most profitable product line for carriers, as 80 cents of every dollar earned in revenue on SMS text is pure profit. In fact, U.S. carriers are pulling in an estimated $20 billion yearly in revenue from text, which works out to about $16 billion in profit.
Texting isn’t going to disappear tomorrow and it’s not going to drop off a cliff next year, but Verizon, Sprint, AT&T, T-Mobile and the rest are still probably scrambling to replace that sweet text profit in the long-term. It’s no wonder wireless carriers in Korea and other countries have tried to block, throttle or slap surcharges on use of SMS alternatives. Luckily, trying that in the U.S. would likely sound alarm bells.
In the end, consumers are fed up with SMS text rates, smartphones are making it easier for users to leave SMS text behind and carriers could — and should — pay the price.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.