Smartphone Boom Means Data Will Get More Expensive as SMS Use Declines

by Trefis Team
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SMS texting rates have started declining in several countries and may soon impact wireless carriers in the U.S., notes Tero Kuittinen, a senior analyst for MGI Research. ((More Signs of Steep Text Message Erosion, Forbes, December 29th, 2011)) Advanced SMS markets such as Finland, Netherlands, Philippines and Hong Kong, where text messaging first took off in the 90s, are among the first to see a steep erosion in SMS usage rates. Since the U.S. saw a boom in text-messaging a couple of years after these markets, Kuittinen expects the SMS usage decline to impact Verizon (NYSE:VZ) and AT&T (NYSE:T) in 2012 and 2013. If he is right, data plans could get costlier sooner than anticipated.

The decline in SMS usage can be attributed to the growing use of smartphones that has caused customers to migrate from traditional modes of communication such as text-messaging or SMS to the more convenient and new age messaging services of social media (Facebook & Twitter), email and other IP-based messaging systems. These services use 3G/4G data connection available on the phones instead of the carriers’ native SMS networks.

See our complete analysis of Verizon here

SMS Costlier than Data Sent Over Internet

We expect the erosion in SMS usage to have a severe impact on most wireless carriers as the carriers 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 Broadband Plans, Company Website)) Each text message has a maximum length of 160 characters, or 160 bytes. The company’s cheapest data plan costs $30 for 2 GB monthly usage. [1] 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 for a maximum length SMS sent as for a similar amount of data sent or received on its 3G/4G service. Considering SMSes are actually much shorter than the maximum 160 byte, the price difference would look even more staggering.

If the trend of declining text messaging rates does hit U.S. shores in 2012 as Kuittinen expects, it will lead to a decrease in average ARPU levels across the industry as customers will 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. However, considering that the wireless industry is so competitive, it will be tough for carriers to quickly increase the prices of their data plans in order to compensate for the fall in SMS revenues. Over time though, we expect data plans to see an industry-wide hike in prices, with one of the market leaders Verizon or AT&T taking the lead and others following suit.

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Notes:
  1. Verizon Mobile Broadband Plans, Company Website []
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