Mobile data services are increasingly cannibalizing on carriers’ high-margin SMS revenues in many advanced SMS markets of the world, a trend that we believe will become increasingly apparent in the U.S. in the coming years. The proliferation of smartphones is causing alternate mobile messaging services such as Whatsapp, RIM’s BBM and Apple’s iMessage in addition to social media such as Facebook and Twitter to account for most of the messages being sent out on mobile networks. As a result, SMS texting rates are on the decline which we believe will impact carrier decisions on pricing data plans in the coming years.
Market research firm, Strand Consult, wrote in a recent report that Facebook’s rise is posing the biggest risk to carrier SMS revenues than the rest.  While BBM and iMessage are restricted to only the respective company’s smartphones, Facebook’s all-pervasive appeal is believed to be what is affecting SMS usage rates the most. While the declining SMS usage trend was first seen in the advanced SMS markets of Finland, Netherlands, Philippines and Hong Kong, Tero Kuittinen, a senior analyst for MGI Research, believes that U.S. carriers Verizon (NYSE:VZ) and AT&T (NYSE:T) could be negatively impacted as early as this year. ((More Signs of Steep Text Message Erosion, Forbes, December 29th, 2011))
SMS Costlier than Data Sent Over Internet
The erosion in SMS usage will have a severe impact on most wireless carriers as they generally charge much more per byte of SMS data sent than any other data sent over Internet. For example, Verizon charges 20 cents per text message sent or received. ((Verizon Mobile Text Plans, Company Website)) Each text message has a maximum length of 160 characters, or 160 bytes. This translates to about 0.125 cents per byte of SMS data sent. In comparison, Verizon’s cheapest data plan costs $30 for 2 GB monthly usage, or about 0.0000015 cents per byte of data sent over its data network.  So, if a user were to send a 160 byte long message over the carrier’s data connection instead of using its SMS services, it would cost him only 0.00024 cents, or more than 80,000 times cheaper.
In other words, Verizon charges more than 80,000 times as much for a maximum length SMS sent as for a similar amount of data sent or received over its 3G network. Considering SMSes are actually much shorter than the maximum 160 byte, the price difference would look even more staggering.
SMS decline may cause data plan hikes
Declining text messaging rates will therefore lead to a decrease in average data ARPU levels across the industry as subscribers substitute SMSes with messages sent over the Internet. We have considered Verizon in our example but most carriers in the U.S. charge similar rates, so the impact of this trend will be felt by most telecom industry players.
This will cause carriers to contemplate increasing their data plan prices in a bid to recover their SMS revenue loss as well as to fund the maintenance of their networks as data usage surges. However, considering that the wireless industry is so competitive, it will be tough for carriers to quickly increase the data prices. We therefore expect the carriers to recover a part of the loss by promoting unlimited SMS bundles for a flat monthly subscription fee first. Over time though, data plans will see an industry-wide hike in prices, with one of the market leaders Verizon or AT&T taking the lead and others following suit.Notes: