SMS, perhaps one of the most profitable legal products ever, looks to be going the way of traditional voice, international direct dial (IDD) and other great telecom earners.

For most of the past decade the service has delivered margins of 90 percent or more for mobile operators.

Now, inevitably, it is just one more telecom service that's being disrupted.

According to research firm Ovum Ltd. , worldwide SMS revenue grew 12 percent in 2010 and 7 percent in 2011, but predicts that growth rate will shrink to 4 percent this year and 3 percent in 2013.

Other statistics suggest the decline may be even sharper.

According to regulator Office of the Telecommunications Authority (OFTA) , the number of text messages sent in Hong Kong on Chinese New Year’s Day, usually the busiest day of the year, fell by 16 percent year-on-year to 24.5 million, the first ever decline. On Chinese New Year's Day in 2011 the year-on-year volume increased by 3 percent and in 2010 it grew 17 percent.

Singapore Telecommunications Ltd. (SingTel) (OTC: SGTJY), the biggest Singapore operator, gave up on what used to be a revenue windfall over that holiday period and actually offered free texts.

But it's not only Asia/Pacific that's noticing the shift. Europeans sent fewer traditional text messages during the Christmas 2011 holidays. Finnish SMS traffic dropped 22 percent, according to statistics sourced from Telia Company and cited by Citigroup in a report that suggests prepaid operators in Spain and Italy are especially at risk from a dip in text-related revenues during the next 12 months.

All of these trends are worrying for operators that are already having to plan for the inevitable further decline in traditional voice revenues. Text messaging is a GSM network feature that was initially overlooked by operators but has become the industry's biggest non-voice revenue stream during the past decade.

It still accounts for the biggest share of data revenue, but that too is changing fast. The difference, of course, is mobile broadband, which is enabling alternative methods of near real-time communication via Facebook, Twitter and the use of downloadable messaging apps such as WhatsApp.

Smartphones are also eating away at SMS. BlackBerry 's free BlackBerry Messenger app has been one of its main attractions for teenagers, while Apple Inc. (Nasdaq: AAPL)'s recent launch of iMessaging may well accentuate the trend.

Clinging on to SMS
Operators contacted by Light Reading were wary about sharing either specific data or their views on the fate of the messaging market.

SingTel, a major shareholder in India's biggest mobile operator Bharti Airtel Ltd. (Mumbai: BHARTIARTL) and a brace of other operators in south-east Asia, said SMS usage across its business was "steady." A spokesperson acknowledged that consumers now have more messaging options, but said SMS remains popular because it is "more reliable and faster" than alternatives.

Australia's Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) said it didn't expect the popularity of operator texting to change "in the near future."

The fact is, almost every operator is now offering very large packages or bundles of all-you-can-eat SMS. And at the same time mobile operators need to deal with a more complex messaging environment, involving social features and multimedia.

New opportunities
One emerging opportunity, according to Ovum, is the combination of SMS and new applications. Apps such as group messaging have created a service with an IP-based interface but which "still depend on the reliable channel of SMS."

And there's a sweet spot for the future of SMS to be exploited, too -- application-to-person (A2P). This includes information-based content such as news and sports results, along with advertising and vertical content. It currently accounts for around 16 percent of SMS traffic and is set to grow to more than 20 percent in the next two years, Ovum predicts.

But in the long term, the decline of SMS is part of the trend towards communications services becoming free bundled apps. Industry analyst Paul Budde says voice and (increasingly) SMS are being used to attract people to certain apps, "and it is within these apps that future revenues will be generated -- the comms will be given free of charge as an incentive."

— Robert Clark, freelance editor, special to Light Reading