SMS has progressively become a major application to drive the development of the mobile data market. The most striking achievement has been the strong growth of interpersonal SMS messaging during the last five years, in almost all regions of the world. And Premium SMS is also driving the introduction of many innovative mobile data services, and has become a key channel for content distribution.
In this piece, we are analysing the market dynamics of the SMS market and the future prospects of evolution.
Why SMS is So Important
In a context of decreasing voice ARPU during the past years, SMS has played a key role in growing mobile operators " data ARPU and improving their overall profitability.
With the exception of Japan and Korea where email was used instead of SMS operators of all parts of the world have seen SMS revenues becoming an increasing share of their total revenues. On average in the world excluding Japan and Korea, we estimate that operators have generated 8% of their total 2004 revenues from SMS. This proportion has even reached 13% for Western European operators. In addition, SMS is the main source of non-voice revenues. We estimate that 77% of all operators "data revenues came from SMS in 2004.
Besides being an attractive revenue generator, high profitability is also a big benefit of SMS for mobile operators. Operators " SMS margins estimates vary, but typically maximum of up to 80-90% of SMS messaging revenues being profit are often quoted.
From a macroeconomic point of view, the SMS economy compares now with other major entertainment or communication economies. Let "s take the example of the music industry. The worldwide revenues from music sales in 2002 are very much comparable to the total world SMS revenues, which were generated by mobile operators in 2004 (around $33bn).
SMS has also become a significant channel to distribute pay-for content, thanks to Premium SMS schemes. In the UK like in many European countries Premium SMS revenues, which are mostly driven by ringtone sales, have exceeded traditional CD single sales.
SMS Value Chain
Let " s first analyse the structure of the value chain for person-to-person SMS services. In the most generic scenario, the network operator managing the customer sending an SMS collects traffic revenues and pays interconnection fees to the network operator managing the customer receiving the SMS. This model has to be slightly adapted when the customer is managed by an MVNO (Mobile Virtual Network Operator) or an ESP (Enhanced Service Provider).
In some cases, a third-party is offering a service enabling to send SMS messages. This is the case of some Web service providers. In this scenario, the service provider is collecting revenues and has to pay for the transport to the receiving network operator, either through an operator or an SMS wholesaler.
Figure1 Typical value chain structure for person-to-person (P2P) SMS services
Let " s now examine the value chain structure for application to person SMS services. In this case, a wholesaler is often involved, managing the transport of SMS between the Premium SMS service providers and the network operators. This enables service providers to distribute their services to multiple operators, without the need to establish connections to the different SMSCs. Operators take care of the billing, and reverse a share of revenues to SMS wholesalers, which in turn reverse a share to the service providers.
Figure2 Typical value chain structure for value-added Premium SMS services
SMS in the World: Comparison and Growth Prospects
In mature markets like Western European countries, the SMS market has gone through several key steps, in a period spanning typically over the last ten years:
The world SMS messaging traffic is currently growing fast and we expect this trend to continue on the short term. We forecast that the world SMS traffic nearly doubles between 2004 and 2006, driven by strong growth especially in developing markets. Next, the growth of SMS traffic should slow down in 2008-2009, due to market maturity.
The trends for person-to-person SMS revenues look different from traffic trends. After strong revenue growth in the 2004-2006 period, we expect SMS revenues to stagnate in 2007-2009, due to price erosion and slowing traffic growth.
Overall this overall trend actually hides important regional differences. In particular we forecast a decrease of revenues in Western Europe from 2006, due to the combined effects of price erosion and decreasing traffic growth, as well as the progressive migration to IP-based messaging applications. On the contrary, revenue growth should be sustained in developing markets such as China, Latin America or MEA as there is still much potential for traffic growth though there will be continuous pressure on SMS unit price.
Figure3 World person-to-person SMS market
When examining more closely the differences between countries, it is important to note the strong correlation between the voice-to-SMS price ratio and the SMS market growth. This is illustrated for instance by the situation in Asia. Countries like China, Indonesia or the Philippines have a high voice-to-SMS price ratio (up to 7:1) and enjoy a fast SMS market growth compared to countries like Taiwan, Thailand and Hong-Kong with a low voice-to-SMS price ratio (of 1:1 or 2:1).
Premium SMS services bring additional revenues to operators, in complement to interpersonal SMS services. This market was estimated to generate $1.5bn revenues for mobile operators in 2004, and to grow to $4.5bn in 2009. SMS kiosks opened to third-parties (with predefined Premium rates) and short SMS codes were set-up at national level, in many countries, and have enabled the development of this market. Most successful Premium SMS services are entertainment services: ringtones/logos download, TV voting, games (quizz).
Figure4 World application-to-person SMS market
The Vendor Landscape
Current positions of SMSC vendors are more and more challenged as operators enter renewal cycle. We have estimated vendorsˇ market shares based on the SMS traffic generated by mobile operators in 2004. Logica is number one and Huawei has become second worldwide vendor due to the importance of its deployments in China. Nokia remains number three, in a quite steady position during the renewal process. Finally dozens of very small players share one sixth of the market, with very specific solutions, and with IP-oriented strategies in the SMSC domain.
Figure5 Vendor traffic-based market share, SMSCs, 2004
What"s Going to Happen Next in Mobile Messaging?
Two trends will shape the evolution of the mobile messaging market. The first one is convergence, to offer customers the possibility to exchange email, SMS, MMS or instant messages between the mobile, the Web or the fixed telephony networks. The second main trend is expansion of message types, with the support of more media types.
In our mobile messaging market scenario, we have considered four main mobile messaging applications, namely MMS, email, SMS and instant messaging (IM).
MMS traffic has so far grown very slowly but we believe it could become significant as soon as camera phone penetration reaches 40-50%, though revenues should remain low compared to SMS. We also expect some migration to occur from SMS to text MMS, as the price of text MMS falls.
Mobile email will enjoy strong development in the enterprise space, but it will be limited in the consumer space outside Japan, due to high SMS usage and low penetration of email-capable devices for the mass market.
Finally, wireless IM usage will progressively cannibalise SMS, with significant impacts of IM on messaging revenues expected only in years 2008-2009. Wireless IM will be attenuated in comparison with Internet IM usage, because of usage-based pricing.
Figure6 World mobile messaging revenues, by messaging application type
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