During a visit to meet Taiwanese mobile operators in the context of forthcoming spectrum licence renewal, we found that mobile operators in Taiwan experienced a sharp decline of SMS traffic as users switched to WhatsApp for messaging, resulting in a decline in SMS traffic of around 12% year-on-year. While other operators have reported that IP based forms of messaging impact SMS traffic (e.g. KPN Q1 2011, reduced Christmas SMS traffic in Finland and Hong Kong) the development from Taiwan is particularly stark. It is not often that demand of a telecoms service declines by 12% in a single year.
From an operator’s perspective the question is whether this good or bad news. In developed markets most operators sell large SMS bundles which often are not used up. The marginal revenue from SMS is likely to be near zero and therefore the reduction in SMS may not affect revenue materially. WhatsApp is a much richer form of messaging and therefore of value to consumers. This makes the mobile phone service more valuable to users and further drives smartphone adoption.
For the Taiwanese operators the good news was that the 2012 New Year SMS traffic peak was much lower this year than last year while making more efficient use of network resources which brings cost benefits. This is a fine example that with new technology potentially everyone is a winner. The same pattern is likely to be repeated for the Chinese New Year on the 23rd of January 2012.
Of course the development is unlikely to increase AVPU and the messaging service is no longer provided by the mobile operator who only transmits the IP traffic. This is further evidence that transmission rather than services is becoming more important for mobile operators, i.e. they start to look more like bit pipes. From the mobile industry perspective often this is viewed negatively, but at the mature stage of the industry life cycle a focus on transmission may increase return on capital employed for mobile operators. After all, services such as WhatsApp are global in scale whereas operator’s services, while allowing for cross network traffic, are not. But as services become more valuable to consumers, so does the capability to transmit the services.
Mobile operators are of course really good at transmission and they have a billing relationship with their clients which could be leveraged to bill of all the new IP based services on behalf of the service providers. Taking the 30% margin on Apple’s AppStore as an indication this could be good business considering that there is no capex associated with this other that perhaps a little billing system upgrade.
Of course we have seen telecoms services declining before i.e. fax and even becoming extinct e.g. telex. In some markets, including the USA, SMS traffic is still growing, but perhaps soon SMS will join telex and fax in the telecoms museum.
Written by Stefan Zehle, CEO, Coleago Consulting
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