Operators better say goodbye to the SMS cash cow

The carrier cash cow of SMS text messaging is on the wane, driven by third-party messaging apps that include BlackBerry Messenger, (s rimm) iMessage, (s aapl) Skype (s msft) and others. The trend was highlighted Thursday by Wireless Intelligence, which used data from Dutch mobile operator regulator OPTA to show what’s going on. From the report:

According to OPTA, the total number of SMS sent in the Netherlands stood at 5.7 billion for the first six months of the year, down 2.5 percent from 5.9 billion in 2H 2010, even though total SMS revenue rose slightly (0.6 percent) to EUR378 million during the period.

This means that, for the first time, non-SMS data is now a more important segment for local operators than traditional messaging — in terms of both revenue and volume. Total data revenue grew 16 percent over the period to EUR405 million ($555.13 million USD), surpassing SMS revenue. In terms of volume (using a base measure of 1MB of data versus one SMS), data is now also larger than SMS, growing 24 percent to 5.9 billion (megabytes) in 1H 2011.

The loss of 200 million text messages by OPTA shouldn’t come as a surprise to carriers, as the proliferation of smartphones makes it far easier for customers to bypass text messages in favor of in-app communications with friends. It doesn’t help that the folks who are most likely to embrace texting are also those that are most likely to have a smartphone. According to Nielsen’s (s nlsn) third quarter data, 62 percent of the 25-34 year old U.S. population have a smartphone and 50 percent of users in groups younger than that also have one.

The trend may be shaping up in Europe and Japan, but even in the U.S. the threat of losing the high margin texting revenue has prompted some changes. This year, AT&T changed its messaging plans to push new subscribers into an all-or-nothing price plan where they pay per text or pay up for unlimited. The bet is most people who weren’t on unlimited plans will find themselves paying more or getting stuck with insanely high bills for sending a few too many texts.

That’s how AT&T is squeezing out the last bit of value from its cash cow, but it’s undoubtedly aware that such draconian measures or too-high-rates on the unlimited side might push people over to the third-party apps even faster. The downside to most of those apps is that users have to make sure their friends are also on the service, which can be complicated. For carriers, the downside is they are trading high-margin texting revenue for barely profitable data use.

So expect more texting and data plan changes, and a continued focus on machine-to-machine communications, as well as more apps that try to make third-party messaging across different platforms easier. The irony is that carriers could implement a text messaging service easily in their new LTE networks, for a fee. The question is if that fee will be low enough (or the service valuable enough) to keep users from defecting to third-party “free” options that they get through their data plans.

Finally, as the future of SMS changes, it’s worth considering who might stick with paying for it a decade from now. Martin Sauter over at WirelessMoves says there may still be a market in his excellent post on the topic.

Perhaps SMS will become or remain an alternative for people who like privacy and services that don’t store and analyze messages for targeted advertising, building social graphs, etc. After all, unlike for web-based services for which users don’t pay anything and are in fact NOT the customer but only a source of information that can be monetized and on top give up some of their privacy, for the SMS service they might still be that: The customer, who pays for the service of sending and receiving messages, free from other needs of monetization such as selling information gained to third parties.

Ironically, as the world moves closer to free, carriers may find themselves marketing to an ever shrinking group of privacy-conscious people. Maybe that will make them think twice about becoming accomplices in government wiretapping?

Image courtesy of Flickr user bixentro.