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Free texts may snatch a chunk of wireless carriers' profits

Jenna Wortham 

At a time when e-mail and many other forms of electronic communication are essentially free, wireless carriers are still charging as much as 20 cents to send a text message to a phone, and another 20 cents to receive it.

Paying so much to transmit a handful of words is starting to look as antiquated as buying stamps.

There are now a growing number of ways to bypass text-message charges using an internet connection—much as Skype allows people to make calls without relying on a traditional telephone line. If these services catch on in a big way, analysts say, they could take a big bite out of the profits that text messages generate for wireless carriers.

On Wednesday, Apple plans to introduce a new service called iMessage, which could quickly become the biggest fish in this pond. The service lets iPhone owners send messages with text, photos and video to other iPhone owners over a Wi-Fi or cellular data connection. The service, part of an update to Apple’s iOS mobile operating system, will automatically handle messages sent between iPhone, iPad and iPod Touch users who have upgraded to the latest software.

“There’s a huge amount at stake here,” said Craig Moffett, an analyst at Sanford C Bernstein, who covers the telecommunications industry. “They are undermining the core business model for an industry that makes most of its money from services that are high priced and low bandwidth, like texting.”

The basic idea is the same with both old- and new-style messages: Short bursts that pop up almost instantly on the recipient’s phone. But the path they take is different. A text message is sent over cellular networks. Services like iMessage transmit messages over the carriers’ data networks and the internet, much like e-mail. Cellphone customers pay for each text message or sign up for a texting plan, while the newer messages will fall under a customer’s wireless data plan.

More than two trillion text messages are sent each year in the United States, generating more than $20 billion in revenue for the wireless industry. Verizon Wireless alone generates as much as $7 billion a year in revenue from texting, or about 12 per cent of the total, Moffett said, and texting brings in about a third of the operating income.

This highly profitable product was something of a happy accident for cellphone carriers. Srinivasan Keshav, a professor at the University of Waterloo who studies mobile computing, said text messages were almost an afterthought when cellphone standards were being developed in the late 1980s.

He added wireless operators realised there was enough spare capacity in a special control channel on voice networks to also shuttle short messages around. “They could piggyback on the phone railway,” he said, which let the carriers deliver messages cheaply. Keshav estimates it costs carriers about a third of a penny to send text messages. Considering the major carriers charge 10 to 20 cents to send and receive them, “it’s something like a 4,090 per cent mark-up,” he said.

At 20 cents and 160 characters per message, wireless customers are paying roughly $1,500 to send a megabyte of text traffic over the cell network. By comparison, the cost to send the same amount of data using a $25-a-month, two-gigabyte data plan works out to 1.25 cents. Over time, analysts say, the new messaging services could cut into the amount of money that carriers can make from each of their customers. They point to examples where the slide has already begun, as in the Netherlands, where the popularity of social networks and messaging applications have shrunk texting traffic and eroded profits.

Analysts say Apple is trying to duplicate the success of services like BlackBerry Messenger, or BBM, a free application for BlackBerry smartphone owners that lets them send messages back and forth as in an instant-messaging conversation. It has engendered loyalty among BlackBerry users and has kept some from switching to an Apple or Android device.

“BBM is the stickiest feature of the BlackBerry experience, even more than e-mail,” said Roger Entner, an analyst at Recon Analytics who follows the wireless industry. “Once you have that, you are considerably less likely to switch away from the consumer experience. IMessage makes the whole iOS universe more valuable.”

Because iMessage would work only between iPhones, iPod Touches and iPads, at least at first, it is not clear whether it would inspire customers to ditch their text-messaging plans. And Apple devices account only for five per cent of the texting traffic sent each year, said Chetan Sharma, an independent mobile analyst.

“But if Apple makes iMessage open and available on other platforms, you could see a much bigger impact,” he said.

History has shown Apple has a way of shaking up the mobile industry by carving out a path to success that causes other hardware makers to follow in its footsteps. “Anything that Apple does, by definition, does not fly under the radar,” Entner said.

©2011 The New York Times News Service

First Published: Tue, October 11 2011. 01:01 IST