Comverse Special Edition, CTIA Wireless, March 2008

Maintaining and Increasing SMS Person-to-Person (P2P) ARPU: Critical Success Factors
By Dror Bin, General Manager, Comverse Messaging

SMS: On the Threshold of Greater Relevance

While there are those who assert that SMS, a deep-veined gold mine for operators, is past its prime, there is ample evidence that the opposite is true - that is, SMS is on the threshold of increasing relevance.

Operators have discovered that they can maintain and increase SMS ARPU by a variety of means.

Grooming the Cash Cow

SMS is a massively successful service that generates the highest revenue for operators with the exception of voice. SMS is the most successful application in 2G networks and, as of now, in 3G networks as well. The trillion-plus SMS messages sent annually generate over $35 billion a year for the mobile industry - a figure forecasted to rise to $50 billion by 2010, since SMS usage is still growing aggressively.

SMS seems likely to remain the most widely used mobile messaging format in the world for some time - one of the largest revenue contributors, accounting for more than 10% of the total ARPU for some operators.

Can the SMS cash cow thrive forever? Many operators are acting to protect and increase SMS ARPU in our evolving communications world.

Although SMS applications (A2P) may also be a rich source for new revenues, the focus of this article is on Person-to-Person (P2P) SMS.

Protecting and Increasing SMS P2P ARPU: Two Promotional Strategies

Currently, the primary source of the massive global SMS traffic is person-to-person (P2P) messaging. The operator has two different strategies to maintain SMS P2P growth, each aimed at answering needs of different user market segments.

Strategy 1: Promoting SMS as a Commodity

Many operators today are experiencing an environment of SMS commoditization. Commoditization refers to a process that transforms the market from one with unique
branded products into a market based on undifferentiated price competition.

When SMS is regarded as a commodity, users already know that the service is reliable and easy to use, and are essentially looking only for the best price.

Still, commodities can be effectively promoted.

Promoting SMS as a Commodity: Choosing Between ATL and BTL

High-profile Above-the-Line (ATL) promotions such as TV commercials can quickly increase awareness and strengthen the brand.
ATL promotions are costly, but can be highly effective throughout the product usage life cycle, including the retention phase.

Low-profile Below-the-Line (BTL) promotions can cost-effectively develop the long-term relationship with the end user, delivering the right messages to the right users.
BTL promotion can potentially result in increased SMS awareness, usage and user retention- all within a small advertising budget.

Lower-cost BTL promotions (such as using SMS itself as a promotion medium) are typically most appropriate in a commodity market, and can be effective in boosting SMS usage and ARPU.

Unlimited SMS Packages

Another way to successfully promote SMS usage in a commodity market is by offering SMS usage packages.

A number of operators have launched “Unlimited SMS” marketing plans, giving a segment of users "Unlimited SMS" for fixed time period and fee. Unlimited SMS typically increases traffic, of course.
However, perhaps surprisingly, it can also increase revenue. How? Unlimited usage can result in increased revenue in several ways, including:

Beneficial Ping-Pong Effect: When users within the unlimited plan send SMS messages to users who are not in the plan, it results in a profitable ping pong effect. The sender under this type of plan is likely to send more SMS messages than usual, and therefore receive more replies by SMS, which the operator can charge for.
New Habits: Moreover, after the free/unlimited SMS promotion period is over, users may have become accustomed to sending more SMS messages. They then may continue sending more messages than they had in the past, and ARPU consequently grows.

Ad Funded SMS

Ad Funded SMS is an additional low-risk way to leverage SMS in an effort to increase ARPU.
Users who opt to activate the service send their messages at reduced cost or free of charge, and in return permit promotions in the otherwise unutilized space at the end of the SMS messages.

The concept proved well accepted by - and even attractive to - users in the youth segment in focus group research that was conducted in 2006.¹ When price is the top consideration, free (ad funded) SMS is unbeatable. The user pays nothing, yet the operator can get paid in full (and even earn a premium) for each message sent as a result of the product promotions. Moreover, many more messages are typically sent because of the reduced cost.

Strategy 2: De-Commoditizing SMS by Adding New Features and Branding

Operators may be able to minimize the SMS-as-a-commodity trend and implement a process of de-commodization by adding value to their SMS offering with new features, capabilities, functionalities, design and branding that make it more valuable to the end user.
This can be done both with and without a client:

Instant SMS Introduces New SMS Capabilities

One effective way to enrich the SMS experience is to add icons, emoticons, presence and colors to the SMS environment. This makes SMS livelier and allows users to personalize their SMS communications according to their own preferences.

Adding Personalization Features to SMS

Additional features can be added to SMS even without launching a full scale Instant SMS service.

Attractive features such as SMS Auto Reply (I can’t SMS you right now…) and Auto Signature import popular email capabilities to the SMS arena. SMS Archiving lets users archive messages, forward them to different destinations, and copy them. SMS Virtual Private Networks create special family and common-interest groups with SMS benefits such as short dialing, send-to-all and group pricing.

For these and other valuable new SMS services, operators may be able to charge full and even premium prices, which could result in increased ARPU, in addition to the potential gain of competitive differentiation and an innovative image.

Conclusion: The Myriad Ways to Boost SMS P2P Revenues

SMS has become integral to our way of life and to many service provider revenues.

Whether SMS is viewed as a commodity or as a differentiated service, operator best practices around the world continually demonstrate that there are many ways to spur the growth and profitability of P2P SMS messaging.

Application-to-Person messaging and PC/Mobile convergence, which are outside of the scope of the present article, provide many further ways to potentially leverage the success of SMS and messaging.