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How much negotiating power does Apple have in wireless? Enough for Dan Hesse, CEO of Sprint, to bet his company on a partnership with Apple.
Last week the Wall Street Journal reported that in exchange for marketing Apple devices, Sprint agreed to buy at least 30.5 million iPhones over the next few years, at an estimated $20 billion cost.
As astounding as those numbers are, huge-volume commitments are only one threat to a wireless operator’s bottom line these days. Another — and potentially more dangerous threat — is the steady encroachment of application players into traditional carrier revenue streams.
SMS is a case in point. Apple just released its iOS5 operating system featuring iMessage, a new and FREE messaging service that competes directly with SMS. Embedded in the core IOS5, iMessage will allow Apple users to text each other and totally bypass the carrier’s SMSC platform, a major source of carrier revenue.
SMS revenue is not only important to U.S. operators; it’s a highly profitable money-maker that pays the bills of other services. Craig Moffett, an analyst for telecom research firm Sanford C. Bernstein, claims text messaging generates a whopping $20 billion in annual revenue for U.S. wireless carriers. Verizon Wireless alone pulls in $7 billion a year from texting, he says.
Apple isn’t the first device maker to get into the messaging game. For several years now Blackberry has offered a similar service to iMessage called BBM, or Blackberry messaging. BBM is a completely separate service from SMS which required Blackberry users to monitor both applications. Not the most user-friendly experience. Unlike Blackberry, iMessage is a consolidated offering which will determine if the message should be routed via Apple’s path or the carrier’s SMSC path. If both paths are available, iMessage will pick the Apple path. I’m pretty sure iMessage will become extremely popular within the Apple community when you combine Apple’s amazing marketing campaigns and its easy-to-use application interface.
iMessage could be a much bigger threat because of Apple’s smartphone market share and cultural clout. You can already see a richer user experience within the service with features like delivery notification. I never knew if my SMS messages were properly delivered, but I know today with iMessage. Features like this will do nothing but encourage more people to use the service and increase customer expectations.
iOS5 will support not only later-generation iPhones, but also the iPads and the iPod Touch. It’s only a matter of time before Google follows up with an Android-based messaging service. Longer term, a cross-platform solution for Android, Apple, and Microsoft devices could leave carriers wondering, “Whatever happened to our lucrative SMS business?“
This is a tough call. I can see how carriers could feel threatened by services like iMessage. Eliminating SMS usage tiers protects the carrier as more Apple users message via iMessage versus traditional SMS. But the reaction could also backfire. With stories in the news about a possible “double-dip recession,“ will consumers opt for any possible way to reduce their monthly telecom expenses? Only time will tell.
So if a high flat rate for SMS is a questionable strategy, what else can be done to meet the iMessage challenge?
I think the first step operators must take is a more comprehensive understanding of SMS usage patterns and cost awareness. Yes, iMessage and other messaging cousins will eventually do some serious damage to SMS revenue, but that’s not going to happen overnight. Carriers will be forced to enhance the user experience within SMS while at the same time monitor pricing to maximize profits.
One of the problems with SMS is that the margins have been so high that people never seriously scrutinized their engineering and wholesale costs. In addition, the user experience is pretty nonexistent. That philosophy has to change because the days of strong-margin text messaging are going to be pressured more than ever with iMessage and other third-party TXT applications. It’s hard to compete with free and Apple’s keen awareness on the user experience.
The right approach to the SMS problem is the same as it’s been for voice: Examine usage patterns in great detail, reconcile bills, negotiate with wholesalers and adjust plans accordingly.
So in the spirit of better traffic analytics and cost management, here are a few basic tactics — things that wireless carriers can do to keep SMS profits rolling in as long as possible:
Connectiv Solutions offers solutions in SMS usage analysis. To learn more, see our video on YouTube or visit the Connectiv website.
This article first appeared in Billing and OSS World.
Copyright 2011 Black Swan Telecom Journal