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Summary:

The humble text message turned 20 years old this weekend, and other than an excuse for cake, the birthday is a great chance to look at how carriers innovate and why they are getting crushed by over the top services now that times have changed.

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The humble text message turned 20 years old this weekend according to the Guardian, and other than an excuse for cake, the birthday is a great chance to look at how carriers innovate and why they are getting crushed by over the top services now that times have changed. So grab your piece of Funfetti, whistle a few bars of the Birthday Song and let’s take a look at why carriers are losing to over the top services: and how they might manage to make it out with margins intact.

The Guardian’s (see disclosure below) story lays out in detail the creation of the text messaging standard. It describes the creation of GSM as a reaction to the complicated and varied analog phone standards in use across Europe. It took ten years from idea to the time the first GSM call was made, and the effort involved 13 countries. As part of creating the GSM standard for networks, the carriers wove in a way to share messages across operators as well. From the article:

The idea for SMS emerged during the GSM project. It was based around a really neat trick – to transport messages on the signalling paths needed to organise telephony during periods when those control channels were quiet. This was a fantastic idea because it meant that there was no extra cost involved in transporting the messages. The only restriction was that they had to be short – no more than 160 seven-bit characters. So SMS was built into the GSM system from the beginning.

And while texting seems like a great example of carrier innovation, it was actually a result of this multi-governmental body demanding that operators find a way to interoperate. So carriers didn’t act alone according to this article. And the usage came about far later than the availability of SMS texting services thanks to young people, who were finally able to afford mobile phones but wanted to avoid high prices on calls. So in truth, texting, a service so innovative that its use is still on the rise today, achieved success (and incredible margins for operators) in spite of the carriers.

And now, as carriers see their high-margin texting revenue coming under attack form over the top messaging services such iMessage, WhatsApp and others, the question most people who follow the industry asked was, “What will carriers do to trip up the competition?” Carriers have been known to block everything from Wi-Fi on handsets to Skype in order to protect their margins, and so it seemed logical they might go after OTT services again.

But carriers are changing. Now instead of a direct block, they are co-opting their competition and may in fact be doing so in ways that will help both consumers and OTT providers, even it it does mean carriers may not get as much as they want. It seems finally the industry might be wising up to the idea that expanding the whole pie might be beneficial even if the carriers have to share the revenue.

Examples of this change in heart include WhatsApp considering a deal with Telefonica to providing messaging services. Or plans from Orange and T-Mobile to include unlimited music streaming services on the phone as part of a data plan. Areas where operators can add value (and thus get paid more) are focused in enterprise settings as opposed to consumer areas for the most part, although mobile security and tie-ins with wireline broadband and home network automation plans might also be something consumers shell out for. Check out the chart above from Chetan Sharma, which lays out areas where carriers might find ways to add value on top of their data plans.

But for carriers to make this leap from the antagonistic “get off my pipes” worldview to becoming one layer among several in a mobile ecosystem, they will have to stop clutching at this myth that they are a bastion of innovation. Instead, they should accept that while they may be innovative as anything when it comes to transmitting packets, no one transmits packets for the sake of transmitting packets. In the pre-IP world they could hang onto the idea that only they could deliver voice, but in a post-IP world they have to realize that while only they can deliver data, data isn’t exactly the service. It’s just another delivery mechanism.

And people don’t buy delivery mechanisms. They buy services.

Disclosure: Guardian News and Media Ltd., the parent company of the Guardian newspaper, is an investor in the parent company of this blog, Giga Omni Media.

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  1. Dave Wright Monday, May 7, 2012

    Stacey, you make some good points, especially the delineation of the periods before and after IP was available all the way to the mobile handset. This opened up the platform to the service innovation/disruption you are describing. Same pattern as when IP found its way into the 3270 terminal (bye bye SNA) or deskphone (so long PBX).

    People may not buy delivery mechanisms, but they certainly are willing to pay for some forms of access, fixed residential and licensed mobile being two examples. There seems to be a default assumption that MNOs cannot survive as “mere” access providers. And yet Chetan Sharma’s 2012 Mobile Assessment reported that access was the fastest growing revenue segment. Some may be able to offer access and provide services as well (full service), but others will not be able to compete effectively in the new services market (infrastructure only).

    I wonder how long we’ll keep calling these services “OTT”. Everything will be OTT before too long. It’s what IP does, it assimilates services onto itself.

  2. Dean Bubley Tuesday, May 8, 2012

    I’m starting to think that this supposed value chain is the wrong way around. *Services* are generally the commodity, and well-run / well-managed / well-priced “data delivery” is the value-add. And people *do* pay for delivery – enterprises have long spent big bucks for leased lines, cellular operators themselves use metro ethernet or dark fibre for backhaul, and others in the satellite & wireless businesses do well for themselves acting as “pipes” of varying levels of smartness.

    Conversely, a lot of what we think of today as “services” such as voice (more correctly telephony), or messaging is becoming downgraded to being a mere feature, either of other apps, or perhaps even the browser.

    And in fact, as Apple demonstrates, at the top of the heap is actually hardware – or even silicon.

    Services have their role. But that’s not where a lot of the most valuable innovation actually happens. It’s also important to note that the way the current telecom accounting methods are set up, services revenues tend to get systematially overstated in importance, compared to reality.

  3. You can’t feel sorry for companies because the greed their CEO’s exude is disgusting. I, for one, can NOT wait for the day when they are merely dumb pipes and have to give in to the innovators…

    http://attsmscashcow.com/

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