Wednesday, January 01, 2003

In most countries in which the GSM cellphone standard dominates, the sending of messages using the Short Message Service (SMS) is extremely popular. These allow short text messages of up to 250 characters or so to be sent from one cellphone to another. Mobile phone companies these days get something over 10% of their revenues from SMS messaging.

This revenue is close to free for the mobile carriers. Associated costs are close to zero. To carry an SMS message, they need to provide a maximum of about 2000 bits of network capacity. To carry a voice call, they need to provide around 15000 bits of network capacity per second . On my mobile phone, I am charged 10 pence to send an SMS message, and I am charged 5 pence per minute for a voice call. That is, I am being charged around 5 pence for 1000 bits of data for SMS, compared to around 0.005 pence per 1000 bits of data for voice. That is, the carriers are somehow able to get away with charging 1000 times as much for SMS. Even better, unlike for voice, where you are having a real time conversation, the transmission of SMS messages does not have to be instantaneous. If the network is busy, then the phone simply waits for a lag in network activity before sending the message. If the phone is in a network blackspot when the message is sent, then the phone simply waits until it is back in a coverage area before the message is sent. Therefore, while phone companies are constantly upgrading their networks to deal with greater demands on their capacity and blackspots in the network for voice, such upgrades are never needed due to increased demand for SMS services. Therefore, money spent on SMS is entirely profit.

The demand for SMS took mobile carriers entirely by surprise. The feature was built into the GSM phone standard from day one, but there was little expectation that many people would use such a limited service. The use of SMS only really took off when large numbers of teenagers got their hands on mobile phones. These are people who are price conscious. Although one SMS message is being charged at a much higher rate per bit than is a voice call, the cost of a message is still usually less than the cost of a voice call. More importantly, these are people who are willing to play with their phones and start using features other than the most obvious. This did not happen until mobile penetration reached around the 50% mark in individual countries. Once it did, and once the phone companies discovered there was money in SMS, then they improved the service. At that point, we got SMS interoperability between mobile networks, both in the same and different countries, information services giving you sports scores by SMS, and the market really took off. The thing worth noting is that network effects are dramatic when mobile mobile penetration rates are high. When penetration rates go from 50% to 70%, SMS message numbers may go up tenfold. Also, at that point, SMS usage escapes the teenage ghetto, as teenagers start sending and receiving messages from adults. Then adults start using them themselves. (I regularly send and receive messages from my 63 year old mother in Australia). Most recently, we have started seeing all sorts of hybrid uses for SMS messaging. The business model behind this is the equivalent of 900 numbers in telephone service: the receiving party and the telephone company split the revenue from the call. With 900 numbers, the caller is charged a premium for the call, but with SMS messages this is hardly necessary, as the margins on SMS messages are utterly enormous anyway. (However, the phone companies have created premium charge numbers for SMS regardless.

This type of arrangement has become particularly popular with the media, especially television companies. SMS messaging is an ideal way to add some interactivity to television programming, allowing viewers to enter competitions and the like. With reality television and talent shows having become a big deal lately, this provides an easy way for viewers to vote for the winners. Of course, television contests involving viewers phoning in have a very long history, but the advantages of doing it with SMS messaging are twofold. Firstly, your mobile phone is akin to a remote control. Most of us carry them with us most of the time, and we therefore don't have to get up from the television and make a phone call. Secondly, television stations do not need to maintain huge banks of operators to answer phone calls, as a computer can accept and process the messages very easily. (Plus, as an added bonus, networks are unlikely to be overloaded by SMS messages, however large their number).

All this was completely unexpected, and it just evolved out of a not very sophisticated technology being there, being useful, and being fairly ubiquitous. Which is why I am actually not all that convinced by this article by Brendan Koener in Slate, arguing that Americans are somehow different, and that American teens will not use data services on their mobile phones (including SMS) for what are essentially cultural reasons. My personal belief is that Americans will be sending SMS messages in surprisingly large numbers within a couple of years: yes, they have been slower in take up of SMS than have Europeans and Asians, but the reasons for this are largely technical. Penetration rates for mobile phones in America are lower than in most other developed countries. I blame this on one factor: Americans pay for incoming calls. This has hindered take up rates of phones in general, and has reduced the amount of time Americans leave their phones switched on. This has also led to the unfortunate idea that mobile phones are things you have "for emergencies", rather than constant everyday use. Secondly, Americans have been much slower switching from analogue to digital phones than Europeans and Asians, and therefore many fewer phones have been SMS capable. When they have switched to digital, Americans have used three different technical standards (D-AMPS/IS-136, CDMA/IS-95 and GSM). While all these standards support SMS, the differences between them have hindered full SMS interoperability between networks. All these factors have meant that the effective penetration of SMS capable cellphones in the US is much less than in Europe. Remember, SMS messaging did not really get going in Europe until penetration rates got over 50%.

Let us look at Koerner's arguments in detail. Firstly, internet access is cheap in the US, and teenagers often have their own computers and their own flat rate internet access in their homes. This is not true in many other countries. My response to this is that this varies widely from country to country, which is good, because you can then attempt to correlate these things If you do, there does not seem to much of a correlation between internet use (and/or the presence of flate rate internet plans) and SMS use elsewhere. My native land of Australia is culturally very similar to the US, flat rate internet access is standard and cheap, teenagers are pampered with their own computers and the like almost as badly as are teenagers in the US, and SMS usage in Australia is enormous. Britain is not as culturally American as Australia is, but it is more so than anywhere else in Europe, and flat rate internet access is once again cheap and very widely used. SMS usage here is enormous too. What Britain has is very high mobile phone penetration. (It may well be that the high take up of a more complicated technology like i-mode in Japan is related to high priced internet access otherwise, but I doubt it for SMS). In both Australian and Britain, teenagers use things like instant messaging all the time when they are at home. I see no evidence whatsoever that this makes them less likely to use SMS services on their phone when they are not at home. (People that age like to communicate with one another a lot).

And I am really not convinced that American parents are any more or less likely to blanch at their children's mobile phone bills than are European parents. European parents spend money on other things for their children too, and are less rich.

American analysts basically think that SMS messaging will not take off there because they see it as a feeble, unsophisticated little techology and think they can see better alternatives. The fact is, though, so did Europeans before it took off. And it took off anyway. To take off properly, the technology requires high digital mobile phone penetration and interoperability between networks. That's all. Its failure in the US until now can be blamed on the lack of these factors. These factors are now in place in the US too, and I expect a major increase (in the order of 300% or more) in the number of SMS messages sent in the US this year.

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