Short messaging services versus instant messaging: value versus volume
Text messaging’s heyday is approaching but in 2014 it should still generate significant margin for the mobile industry. Its importance should be neither overlooked nor underestimated.
There are several ways for operators to respond to the negative long‑term outlook for SMS.
One would be to try and create an operator‑owned OTT MIM to rival the existing providers. For this to work as well as SMS, it would need to be a global standard; if the industry relies on opt‑ins on a per carrier basis, adoption is likely to be too slow.
A further option would be to incorporate MIM‑type features into SMS, such as by replicating the ability to send messages to groups easily, and to include audio and video clips. Presence functionality may also help.
A third option would be, rather than compete with MIM services, to encourage their adoption, so as to increase take‑up and usage of mobile data. Carriers should evaluate the merits of exposing network and data assets to OTT players via APIs (Application Programming Interfaces). Carrier APIs allow third parties to integrate their applications and services more closely with the mobile device, the SIM card and elements of the network. Functionality ranges from in‑app advertising through to ‘add‑to‑bill’ processing, which allows the value of in‑app purchases, such as emoticons, stickers and games, to be added to the monthly phone bill. Given that MIM services tend to have low consumer loyalty, carriers could help improve the dynamics of OTT MIM, whilst at the same time positioning themselves to capture a share of MIM revenues. Figure 13 provides an example of some of the APIs that a carrier could expose.
A final option for carriers would be to encourage the usage of SMS as a bearer for application to person messages (A2P), which are used to send personalized messages to individuals, from advice of bank balance, to warning of a delay to a flight, to a reminder for a medical appointment. One analyst has estimated that A2P messaging volumes could grow an average six percent per annum over 2013‑2017.
Standalone MIM service providers aiming to maximize revenues may need to diversify their income streams. Some providers may become content platforms. In Asia Pacific, companies such as KaKao and LINE are monetizing their significant installed bases by positioning their service as a platform for games, virtual goods and advertising. Deloitte estimates that revenues generated for MIM service providers from games bought or played on their platforms and other virtual goods, such as stickers, will be worth over $1 billion in 2014 – a significant sum, albeit still a fraction of revenues generated by SMS services. Standalone MIM providers may also want to generate additional revenue from advertising, but this might cause some users to change their service.
Middle East perspective
The global decline in SMS volumes at the hands of mobile instant messaging (MIM) is also felt by telecom operators in the Middle East. In the UAE, SMS volumes have dropped considerably in recent years, with a decline of 24 percent between 2009 and 2012. MMS declined even faster, almost 50 percent over the same period369. This trend should not surprise, particularly in the UAE, which at 74 percent has emerged with the highest smartphone penetration rate in the world, and where MIM are the most popular, frequently downloaded and used apps. Surveys amongst users in the region reaffirm this, with 77 percent ranking communication apps the most popular and 58 percent using them the most frequently. For example in Saudi Arabia, the largest smartphone market in the Middle East and third globally with 73 percent penetration, WhatsApp was the most downloaded paid app towards the end of 2012.
Two areas of concern for regional telecom operators arise from this. The first is the fact that both globally and locally, SMS and MMS is declining. The second is the pace of that decline in the Middle East, estimated at 9 percent per annum so far in the UAE alone. In dollar terms, we expect the impact of OTT on operators’ SMS and MMS revenues to be in the range of 5 to 6 percent in the next 5 years. Though this seems small, SMS is still one of the highest margin services provided by operators, so the impact on profit could potentially be greater. At the same time, higher smartphone penetration and stronger affinity to MIM makes it more ubiquitous in the Middle East than anywhere else in the world. Coupled with increased multimedia sharing in the region, MIM is a stronger driver for data consumption. For example, WhatsApp’s recently rolled out cross-app content sharing capability has enabled one Middle Eastern music streaming service to share 50 percent more of its songs via WhatsApp than on Facebook. That said, we also expect Facebook’s recent acquisition of WhatsApp to accelerate the region’s MIM data sharing and consumption habits as well as to increase the user base across both, as it seeks to integrate messaging and photo services across the two platforms.
Globally operators have used one of the following strategies to combat OTT: defend (block OTT MIM, improve SMS pricing), replicate (compete with their own OTT MIM, acquire an existing OTT MIM) or partner. In the region, we expect operators to adopt a partnering approach to encourage data consumption and expand new revenue streams. Saudi Arabia’s Mobily has already taken this step through its partnership with WhatsApp in 2012. Under the agreement, Mobily can exclusively launch WhatsApp packages in the Kingdom, in which users pay a monthly or weekly subscription fee to enjoy unlimited WhatsApp usage.
In the interest of maximizing the bottom line, operators in the region should also aim to retain and extract the most value from their SMS share while they can, for instance through application to person (A2P) messaging from GCC mGovernment programs, mobile banking and business to consumer (B2C) SMS advertising. At the same time, operators should capitalize on the greater volume of data consumption that the region presents with its broader MIM base.