By using a pay-per-use model, service providers can actually attract subscribers, encourage usage, and realize revenue immediately without substantial overhead.

The statistics are staggering - billions of text messages sent every month in Europe alone. In the Philippines, wireless messaging has been used to bypass government censors and coordinate protestors. Teenagers in Scandinavia are so agile with their mobile phone interface that they can "touch type" messages to their friends in a clever form of mobile shorthand ("may b l8 sry" = "I may be late, sorry").

What is this simple - yet powerful - service, why is it such an important profit opportunity, and why hasn't North America experienced the same phenomenal growth?

Messaging Is a High-Value, High-Margin Service
As a category, messaging comes in several forms: short message service (SMS), multimedia messaging service (MMS), and traditional e-mail extended to mobile devices. Today in North America, messaging accounts for a tiny fraction of revenues - less than 1% for most carriers. This is in stark contrast to European carriers whose messaging revenues (primarily SMS) account for 10-20% of revenues. More important than the absolute revenue generated, however, is the high profitability of messaging services.

A one-minute voice call generates on average $0.12 of revenue at a gross margin of 50-60% (based on costs for systems operation, depreciation, and license amortization). A single text message generates on average $0.15 of revenue (European average) at a gross margin of 95% or better. Why has messaging become so popular and sustained its value in countries outside of North America? Text messaging is a very efficient form of communication for many end-user applications. For example, a messaging subscriber who is meeting a friend for dinner but forgot the address may avoid an extended conversation over the phone with a messaging exchange as simple as:

Message: "cafe addrss pls"
Reply: "102 yonge st. c ya"

North Americans, in fact, are already conditioned to the value of messaging - instant messaging on wireline networks has been wildly successful (if not revenue generating... yet). AOL has offered its AIM instant messaging service to most mobile service providers as an extension of its wireline offering. Yet despite this, North American consumers - and their mobile service providers - have been left behind in the messaging bonanza for three fundamental reasons:
1.  Subscription-only business models discourage adoption
2.  Limited interoperability between technologies, and carriers' limits on usage
3.  Little or no support for prepaid messaging eliminates the lucrative teen market

Consumers Like to Be Convinced
Many consumers are wary of making long-term commitments to a product before they are convinced of its value. For example, how many magazines would you read if the only purchase option offered was a yearly subscription? Not that many. Consumers like to try things before committing to them. One of the reasons that prepaid services have been successful in Europe is they allow consumers to try products and services before they must commit to them. While subscriptions are also an important packaging option for mobile services, in many cases they need to be complemented by a pay-per-use option. Failing to do so will limit adoption.

In the case of messaging, a subscription-only model is a significant inhibitor for both adoption and usage. The subscription model has numerous limitations, the most significant being the barriers to sampling. The value of messaging increases with the number of users in the messaging network - the requirement to subscribe (even if for free) prior to sampling introduces a significant decision point. As in the case of magazines, which is more convenient for consumers, a magazine they can purchase off the rack to sample with no future commitment, or a magazine where they get the first issue free after signing up for a subscription but can cancel after the first month?

By using a pay-per-use model, service providers can actually attract subscribers, encourage usage, and realize revenue immediately without substantial overhead. Consider the model summarized in Table 1: in this scenario a five million-subscriber ser-vice provider compares subscription and event-based pricing models for text messaging (the ideal case, a combination of subscription and event-based, has not been shown to simplify the example).

The spreadsheet model shown in Table 2 takes these qualitative statements and applies them to a mobile service provider of five million subscribers. This model assumes that all handsets are messaging capable. In the subscription-only case, end users can send messages only if they are subscribed to the text messaging service (first month free). In the event-based case, all end users are able to send messages and are charged per message.

The optimal approach, of course, is a Value Model that combines events and subscription options - just as magazine publishers have a "newsstand" option and a "subscription" option. However, because no physical distribution or production is involved, mobile service providers can be even more creative. Rather than per-month pricing for picture messaging, a mobile service provider could generate incremental revenue immediately by offering more choices to existing and potential end users with the following options:

Photo Friends: Free two-minute phone call for each picture message sent to a member of your Photo Friends list

What is less well known is that many North American service providers have been forced into a subscription-only model not by strategic choice, but rather by legacy billing system limitations. The "dirty little secret" within many service providers is that the full value of billions in network investments cannot be exploited due to inflexible and purpose-built billing systems. In most cases, any significant changes to service definition, pricing model, packaging, or payment options requires an 8-9 month custom development project. As a result, many of today's subscription plans for messaging (i.e., $4.00 per month for the first 100 messages, $0.10 per message thereafter) are really unlimited since the billing system has no ability to mix subscription and event-based models.

Enabling the Network Effect
The legacy billing system inflexibility that forces subscription-only models also creates a significant barrier to the network effect - the phenomenon where a service becomes more valuable as more people use it, encouraging ever-increasing numbers of adopters. The lack of common standards and interoperability has also limited the network effect by restricting messaging within a single mobile service provider or within a single country. For the European market, inter-country and inter-carrier barriers have mostly been eliminated (for text messaging), creating an environment in which users can freely communicate to the benefit of all players.

In North America, barriers between services, countries, and technologies such as CDMA, GSM, TDMA, and iDEN still exist in practice (although they are in the process of being eliminated). The fragmentation of the North American market (as compared to European countries) makes it even more important that interoperability be achieved.

In addition to solving network integration challenges, mobile service providers will need to address the additional network challenges of interconnect and settlements on messaging revenues. Mobile service providers with the capability to track and charge for messaging services on an event basis will be in a much better position to accurately account for and settle inter-carrier transactions. Again, legacy-billing systems are the gating factor to this critical functionality.

Prepaid and Messaging
The prepaid community will become increasingly important going forward since messaging services - if the experience of Europe holds true in North America - are particularly appealing to younger end users who will likely be on prepaid plans. Yet in the North American mobile industry, prepaid users remain second-class citizens, paying more for voice service with access to few, if any, value-added services. Excluding prepaid users from messaging services not only further inhibits the network effort from being realized, but also limits the profitability of the prepaid segment.

In addition to increasing revenue, mobile service providers must also consider average margin per user (AMPU). Prepaid users tend to have lower - and fixed - average revenue per user (ARPU) profiles. The focus must be on making those users more profitable by mixing in higher margin services. Offering prepaid users high-margin services, such as text and picture messaging, can substantially increase the overall profitability of end users.

Figure 1 illustrates how the introduction of high-margin services can improve a blended margin of 60% (voice only) to nearly 80% (50% voice, 50% messaging). This is not a hypothetical example. A leading mobile service provider in Scandinavia has achieved a 50/50 split of voice and messaging services in its prepaid base, resulting in higher prepaid user profitability.

The "dirty little secret" of legacy billing system limitations applies here as well. The decision to restrict prepaid users from value-added services, including messaging, is typically driven by mobile service providers having prepaid systems that were purpose built for voice services only. Prepaid voice systems, unlike traditional billing systems, are typically built into the network, or prepaid calls are transferred to a third party for processing. To fully capitalize on the prepaid opportunity for messaging services, mobile service providers must have a billing system that will meet the flexibility demands of supporting value-added services for the prepaid market.

Messaging, Billing and Sustainable Competitive Advantage
Messaging services represent a significant opportunity in the years ahead. Mobile service providers that are able to charge for the value of messaging services, remove barriers to interoperability, and extend messaging to prepaid users will gain sustainable competitive advantage. Those who attempt to bend consumer behavior to compensate for failings in their billing systems will face a greater challenge.

The most successful mobile service providers will opt for billing solutions that give them the flexibility to rapidly follow the leaders in other consumer markets. But messaging is not the ultimate end game for service providers. Putting the systems and business foundation in place to properly support proven services like messaging will only make the job of tackling the flood of additional new services yet to come that much easier.

Published Jan. 1, 2000— Reads 8,057
Copyright © 2009 SYS-CON Media. All Rights Reserved.

Related Links

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About James Morehead
James Morehead is senior director, solutions marketing, for Portal Software. Prior to joining Portal, James spent nearly eight years with Nortel Networks in several different roles including IT development, wireless network engineering, and wireless Internet marketing. He is a computer engineering graduate of the University of Waterloo (Canada) and completed an MBA at the University of Toronto (Canada).

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