For those of us who closely watch the mobile messaging industry, SMS, the crown jewel of many operators’ data ARPU results is undergoing tremendous change. This is a natural evolution instead of a revolutionary change. In previous blog entries and articles, I’ve written about the NUVOs – (e.g. Network Unaffiliated Virtual Operator). They are sometimes called Over-The-Top Service providers or App-based SMS or simply messaging providers. I’ve also differentiated the true app-based SMS providers, offering an alternative SMS application with a fully functional E.164 telephone number vs. those that are device app to app and do NOT interoperate with the rest of the telecom industry. A “true” NUVO interoperates with the remainder of the ecosystem. That is a key differentiator.
In recent months, there have been some indicators that have made many think that because apps like WhatsApp or Kik are out there, that they are going to fully replace SMS. I’m sorry, but that is not the truth… BUT, there is a caveat to that. I’m going to quote the article KPN Outsmarted by Smartphones by Archibald Preuschat (The Source, from the Wall Street Journal):
“Text messages, a killer application which for years have generated a decent revenue stream for telecom operators, has become increasingly unpopular in the Netherlands. Smartphone users here prefer to use instant messaging on their devices, like BlackBerry’s Ping or the WhatsApp application which runs on different smartphone operating systems, including Apple’s iPhone. The use of instant messaging for no extra charges, if users have a data bundle, is widespread among young users but not isolated to them, KPN said.
As a result of this trend, KPN’s Dutch mobile service revenue dropped by 8.1% in the first quarter.”
Wow! What has happened here? Why is this happening to KPN and possibly other Dutch operators? I have a theory.
App based chat or “messaging” programs such as Kik and WhatsApp do not interoperate with the mobile messaging ecosystem. A Kik or WhatsApp subscriber cannot send a message to a Vodafone, KPN, Verizon, T-Mobile or of the other 5.2 billion subscribers through SMS, addressed by their phone number. But in many countries in Western Europe and around the world the mobile operators have made it difficult for new entrants (and I’m talking about NUVOs) to acquire phone numbers AND to exchange “domestic” traffic with the mobile operators in their country.
Why is that? For one, all of the MNOs are generally GSM operators – they connect to each other bi-laterally via SS7. They only use messaging hubs for international traffic – not national traffic. A new entrant has to be accepted (if they can get numbers) and be viewed on the same playing field as the mobile operators. This is why it has been extremely difficult for NUVOs to get a foothold in Europe and most of Asia, like they are in the United States and Canada. But, the non-NUVO, app-only-based chat programs such as WhatsApp, which was specifically cited in the article, are popular, as the subscribers want lower cost or free messaging that is now readily available on Smartphone and other connected devices. The only way for the non-interoperable apps to work is when both parties are using the apps. Telephone Number based NUVOs are not an option, here.
So, I bet you’re thinking now… How will allowing NUVOs into the marketplace help KPN and other mobile operators? For this theory, I am drawing from the recent experience of the US operators and trends that I have seen emerging in the US market.
In the last quarter, our messaging traffic statistics has shown that the US operator traffic grew approximately 3% over the 1st quarter. That’s good, steady growth. But, if we drill down, and look at how much of that messaging growth was due to NUVOs being in the market, the results are startling. My estimates show that overall; approximately 2/3rds of that 3% growth was due to MNO to NUVO traffic. In fact, some US carriers would have shown a quarter over quarter DECLINE in messaging, if not for the MNO subscribers sending SMS to NUVO subscribers!
Thinking about it, it makes sense. US NUVO traffic from MNOs to NUVOs is now well over 1 billion messages per month – accounting for 2-3% of the MNOs outbound traffic to other operators. Inbound NUVO traffic to these operators is about the same, indicating a balanced ecosystem. Sure, there are subscribers using NUVOs instead of the MNO’s messaging services, BUT as many or more are using NUVO services on devices other than mobile phones – iPod Touches, iPADs, tablets, even PCs – this simply increases the “universe” of available destinations for all – including the US MNOs. This is true Person to Person traffic. Even most NUVO users on mobile devices keep their MNO-supplied messaging services and use the NUVO as a 2nd number as many like to segregate their messaging traffic.
In Verizon’s recent Q2 earnings discussions, they noted that Verizon Wireless’s data-ARPU was $5.5 billion, up $ 1.1 billion or 22% over the 2nd quarter of 2010. Furthermore 39.5% of the total ARPU was data and smartphones were at 36% of the subscribers, up from 32% in Q1. AT&T posted a 23.4% growth in wireless data to $5.4 billion.
People want to use whatever telecommunications medium that is popular to reach family and friends – whether that is voice or messaging. If a messaging medium like SMS comes along, the users are going to assume that it is and should be ubiquitous. In markets dominated by GSM-only operators, NUVOs are not an option for the myriad of new connected devices that are not smartphones – thus subscribers and non-subscribers alike have no choice but to turn to non-SMS “messaging” apps. And that WILL cannibalize SMS revenues, which in turn can lower data ARPUs and can even cost jobs.
In markets dominated by GSM operators, all "true SMS" is only for GSM operators’ subscribers. This then completely leaves out the millions of devices that are connected, but cannot interoperate with this GSM-only SMS ecosystem. To me, that is a problem with unintended consequences. The users of these apps and devices will turn to their only choice - non-interoperable solutions (e.g. Kik, WhatsApp, and others).
My recommendation – make it easier for NUVOs to enter the market and assign local phone numbers to apps and devices. Be open to allowing the NUVO (either directly, or through one of the messaging hubs) to interoperate as if the NUVO were another GSM carrier. Yes, there will be some cannibalization of SMS revenues, but the overall universe of SMS-enabled devices will increase substantially. In fact, some NUVO demographics show that they are tomorrow’s mobile phone subscribers.
I recently had a look at some rankings of “social networking” apps across both Android and iOS devices in the United States. The true SMS-based NUVOs all ranked considerably higher than ALL of the non-SMS messaging providers WhatsApp and Kik. The rankings were based on both app downloads and active users of the apps. This clearly shows that consumers wanted the messaging apps that were interoperable with the rest of the existing SMS ecosystem.
What this means is that there will be more SMS-enabled devices in the marketplace. Subscribers will send more messages, which can help recover some of the lost messaging revenue.
The future should be bright for SMS. Yes, it is a very mature medium and it will not grow forever. It is evolving and both MNOs and NUVOs alike are showing really strong, innovative features. SMS isn’t done – by a long shot. Yes, there are new players, but mobile operators should not fear them, because, as the current data shows, they can actually help the entire market.