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To be or not to be in SMS biz: 2 firms that refuse to sink like Hamlet

According to research company Ovum, telecom firms are facing a steady deterioration in SMS services, a long-time cash cow

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What do you do when your business model is confronted with a sudden technological disruption? This is the dilemma faced by two rapidly growing companies which have leveraged the Short Message Service (SMS) platform for their businesses.

One is Innoz, a company incubated by private equity firm Seedfund, co-founded by and three of his buddies, all of whom dropped out from a small engineering college in Kerala. allows anyone with an unglamorous feature phone to surf the net via its service, dubbed 'SMSGyan'. All you have to do is type in a query and send it to #55444. An automated search engine will then scan the net and spit back the answer into your feature phone in a flash. "We are trying to connect the unconnected around the world," says Ravindran.

Business has been brisk. The company serviced five million queries a day posed by 125 million customers, a little over seven million being active ones. Thanks to their inquisitiveness, the company made a net profit of approximately Rs 5 crore in 2011-12, a doubling over the previous year and at a 42 per cent margin. "Innoz gets 20 per cent of its revenues right off-the-bat and doesn't have to rely on an advertising model," says Mahesh Murthy, partner at Seedfund.

Gupshup is another outfit which uses the platform for its business. It does so by disseminating content such as popular jokes and financial information among a user base of around 65 million, a third of which are regulars. They, in turn, attract targeted advertising. Gupshup's revenues have also been rising at a rapid clip-the company estimates it will post revenue of Rs 100 crore this financial year, a 50 per cent increase over last year.

Yet, in a country with one of the fastest global growth rates in smartphones (129 per cent in the June quarter of 2013 versus the previous period), could the SMS be an endangered species? After all, according to research company Ovum, telecom companies are facing a steady deterioration in this long-time cash cow. It says SMS growth rates fell from 14 per cent in 2011 to eight per cent in 2013. By 2015, SMS revenues will begin to plateau.

One of the biggest culprits for this erosion has been the rise of the messaging app, such as WhatsApp, Line or WeChat. These services offer free instant messaging capabilities if you're connected to the net via WiFi or a data plan, and have eclipsed the SMS in terms of popularity, with hundreds of millions of active users worldwide.

So, Gupshup has decided to go the app route and has joined the herd in launching one of its own, called Gupshup Messenger. "SMS is not going away," says Beerud Sheth, co-founder and chief executive of Gupshup, and he's right. As more of the unbanked population come into the financial mainstream, SMSs might increase in their proliferation. Companies like Makemytrip.com continue to launch services on the platform because of its reliability and reach.

But it might not be where everyone wants to be or where the real money is. "Clearly, we're moving towards data," says Sheth. "A lot of the new product innovation and energy is talking place there. We knew what was coming but it hadn't arrived yet, so we were waiting for the right opportunity to migrate." And, a body-blow in the shape of the Telecom Regulatory Authority of India's recent mandate preventing mass SMS dispatches nudged Gupshup towards its latest avatar.

Gupshup's messenger is a little different from the others - more like Twitter, according to Sheth. Here, people can post messages on public bulletin boards and make new friends, while companies can run their own forums and attract eyeballs. Plus, it is able to transliterate nine Indian languages (convert a Tamil world written in English to Tamil), thanks to a multilingual feature, a smart addition, considering 11 per cent of its App-driven messages are already in regional languages.

Innoz, however, has decided to go the other way and expand its SMS model. "There are five billion dumb phones in the market with no access to the internet," says Ravindran. "We want to provide them with an experience more like the web than ever before."

Essentially, what Innoz is doing is giving a facelift. It has helped create a climate for 50,000 third-party app developers who create apps with interfaces that ride on the SMS platform. These don't look very different from what a smartphone looks, with similar icons. When you click on one - say, a train icon - and enter a destination and dates for travel, the service simply performs the same task that SMSGyan does. Ravindran says 10 million Lava handsets are currently being shipped with Innoz's apps loaded on to these.

What will happen when ultra-cheap smartphones are eventually introduced to rural areas, obliterating feature phones? "No technology stands forever," says Ravndran. "Change is always inevitable." He thinks that while the game will eventually change, so will Innoz, armed by then with a bucketload of new customers. "Google started off as a search engine but now it has an operating system (Android, Google Glass) and an app store," he explains.

Innoz has a proven technology and its product has been hailed for its ingenuity. However, in a rapid convergence of voice and the internet, challenges can be considerable. "If you want to target an emerging market, you need to open up multiple channels such as voice and data. Here, accessibility is key and people often switch channels when one is weak," says Neha Dharia, analyst at Ovum.

For Innoz and its brethren to succeed in the long haul, it needs to make sure it can adapt along with the rapidly shifting sands of technology and consumer behaviour.

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