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SMS in the U.S. -- All Upside?

There has always been a lingering question over the potential success of two-way text messaging, or short message system (SMS), in the U.S. Despite the phenomenal takeup of the technology in the rest of the world, market analysts have often said that it couldn’t happen here because Americans are “laptop-centric” and therefore resistant to adopting text messaging behaviors.

However, inter-carrier messaging is now possible in the U.S. and -- analysts be damned! -- early reports suggest that SMS is set to take off in spectacular fashion.

The key that has opened the SMS floodgates is the April 1 agreement between carriers to open up their networks (see CTIA: Wireless News You Can Use), enabling their subscribers to send short-text messages to subscribers on other networks. Previously, operators like VoiceStream Communications and AT&T Wireless had pioneered the use of SMS stateside (see Real SMS Comes to the US). Now, Sprint Corp., Verizon Wireless, and Cingular Wireless have joined the party. Nextel Communications has not announced its participation yet.

Industry sources indicated that text messaging volumes have increased significantly since the inter-carrier capability was implemented. "It's like we opened the doors and people just started swarming in," an executive confided, "It makes you wonder why this didn't happen a year ago." A Verizon spokesperson confirmed this, saying it saw a 25 percent increase in SMS the morning after flipping the inter-carrier switch and is currently seeing more than 2 million SMS messages sent per day.

Why it didn't happen a year ago is not that great of a mystery. U.S. carriers are still thrashing around in the chaotic and disorganized market that exists in the States.

In Europe, the adoption of GSM as the standard format for digital cellular networks created a structure that allowed for rapid adoption of advanced wireless services like text messaging. Despite the fact that SMS is part of the GSM specification, though, its success even took the European carriers by surprise. The GSM Association says that, globally, it expects something like 350 billion SMS messages to be sent this year.

In the U.S. the carriers are juggling the demands of disparate technology platforms on top of major challenges in the economy, capital markets, and operations. The U.S. wireless environment has been so obsessed with 3G, the CDMA vs. GPRS debate, and stock prices, that it's no wonder SMS hasn't received intense focus. However, it appears the carriers are learning that playing nice together in certain aspects such as inter-carrier messaging will bring benefits to everyone.

So why is this move to messaging a big deal? Public equity research analysts are concerned about the decline in ARPU (average revenue per user), as discussed in our recent Wireless Oracle report, "U.S. Wireless Carriers: Cash is King." This has been one of the factors, besides slowing subscriber growth, that has hurt wireless carriers over the last couple of quarters. Therefore, anything that can arrest the decline in ARPU will become very popular, very quickly.

Early indications show that incremental revenues from SMS will be one important component in arresting ARPU decline. In fact, a look at the pricing shows how the increased traffic could be a bonus revenue generator.

SMS prices offered by U.S. carriers range from $0.01 to $0.10 per SMS, depending upon the plan utilized:

  • AT&T Wireless: $0.10/msg or $4.99 for a bucket of 100 ($0.05/msg) plus $0.10 per additional SMS.

  • Cingular: SMS can be bought for $0.10/msg or in buckets of 100, 250, or 500 for prices ranging from $2.99 to $9.99/month ($0.02 to $0.03/msg) plus $0.10 per additional SMS.

  • Sprint PCS: $0.10/msg or 50 “updates” for $5.00 ($0.10/msg) plus $0.10 per additional “update”

  • Verizon Wireless: $0.02 received and $0.10 sent per SMS, or buckets of 100, 200, and 600 for prices ranging from $2.99 to $7.99 ($0.02 to $0.013/msg) plus: $0.02 received and $0.10 sent per additional SMS.

  • VoiceStream (soon to be restyled as T-Mobile): 300 SMS messages are offered with each of its iStream plans, ranging from $2.99 to $59.99/month, no details available on additional messages.

Considering its potential for new business, it now seems that the significance of the April 1 inter-carrier messaging has escaped many people -- and could provide an upside surprise to the industry.

— Jacob W. Kaldenbaugh, research analyst, Wireless Oracle
http://www.wireless-oracle.com

Editor's Note: Light Reading is not affiliated with Oracle Corporation.
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