The end of an era for SMS as IP-based messaging goes from strength to strength
SMS generated extraordinary profits for many years, but now looks unsustainable as smartphone penetration increases and a range of IP-based alternatives become available. Speculation concerning the fate of mobile operators' 'cash cow' is increasing. In Analysys Mason's recent report, Operator and OTT voice and messaging services in Western Europe: forecasts and analysis 2012–2017, we provide our outlook for the messaging market, for both legacy SMS and for emerging IP-based alternatives.
A large and increasing proportion of mobile users are adopting alternative messaging services, whether cross-platform messaging applications such as WhatsApp Messenger, or platform-specific services such as Apple's iMessage or RIM's BlackBerry Messenger. Usage within closed user groups is typically free of charge or for a low annual subscription fee, so the pricing of these services is clearly attractive in comparison with operator-provided SMS. Users are also attracted to added features such as presence. The greatest impact has been in countries where the SMS market is weak. According to our latest survey data, 63% of smartphone owners in Spain used alternatives at October 2012.1 Anecdotally, penetration in the Netherlands is at a similar level.
The ready availability of low-cost alternatives together with the prevalence of large, flat-rate SMS bundles means that messaging revenue for operators in most Western European countries will no longer increase. The SMS market in Western Europe is in decline: at a regional level, revenue has been falling since the fourth quarter of 2011. We believe that retail messaging revenue peaked in 2011 (see Figure 1) and will decline rapidly in most Western European countries thereafter. We are usually reluctant to forecast inflection points around the base year, in this case 2011. In the case of messaging services, we believe that this is well-founded.
Figure 1: Messaging revenue by type and its share of total mobile revenue, Western Europe, 2009–2017 [Source: Analysys Mason, 2013]
Overall, we expect messaging revenue to decline by 39% between 2011 and 2017. In Spain, which has the highest prices and the lowest volumes, we expect the level of messaging revenue in 2017 to be barely a quarter of what it was in 2011. Traffic substitution will be faster than revenue substitution because operators will continue to allocate revenue from bundles to messaging, regardless of actual usage.
Operators are belatedly investing in their messaging services in an attempt to retain some competitiveness. They are responding to the increased availability of alternatives by offering their own IP-based messaging services and are adopting three main approaches.
- RCS/joyn is specified by the GSMA and is the industry's official response. The service is typically rolled out as a co-ordinated operator response with interoperability as a marketable feature. This approach is gaining momentum in countries where the SMS market is under strong pressure and the argument for self-cannibalisation is easier to make.
- 'Telco OTT' services are proprietary services offered by operators following an OTT model. Services are either developed in-house (often with the help of a specialist vendor) or offered using a white-label service. Many operators are using 'telco OTT' services to address specific market niches that are seen as vulnerable to substitution. Some of the major players are experimenting with both RCS/joyn and 'telco OTT' approaches.
- Partnership with a provider of alternative messaging services is an option for many operators. The brand strength of the partner is chiefly used to support the operator's data proposition rather than bolster the existing messaging service. This approach particularly appeals to smaller, disruptive players with less exposure in legacy revenue.
Self-cannibalisation is becoming acknowledged as the preferred strategy for most operators as they revamp their messaging services to compete in a data-centric mobile market. The challenge for operators is to create a strong user experience and give subscribers little reason to go elsewhere. Despite these efforts, non-operator-provided OTT messaging services will continue to grow strongly from 2012 to 2017. We expect service penetration of smartphones to increase to nearly 60% in Western Europe by 2017, whereas we expect operator-provided IP-based services to reach around 35% of smartphone users in the same period.