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Operators who take SMS seriously will stand a much greater chance at succeeding with next-generation data services.

The global market for SMS-based services has undergone a significant expansion during the past year. Previously, the use of SMS services in North America was minimal, despite the fact that since the mid-1990s most mobile phones have been equipped to send SMS messages. But it has only been in the past 12-24 months that the use of SMS services has begun to take off.

Traditionally, retailers have been very proficient in selling mobile phones and airtime minutes, but they have not focused on value-added services surrounding the phone. This can be attributed to the lack of financial rewards for focusing on these services, and things are now changing.

SMS is one of many products that can significantly help operators become more visible in the eyes of the customer, and help position operators in the wireless market. Ordinary phone services are very difficult to position since they are indistinguishable in the "ears" of the customer. You cannot tell the difference between making a call on one operator's network and making it on another operator's network. SMS services, on the other hand, can help operators position themselves within the marketplace. The quality and quantity of these services are much more tangible in the eyes of both customers and retailers. Increasingly, it is through these types of products and services that operators will be able to distinguish themselves, thus avoiding having to compete on price alone.

SMS services can also help extend the time the customer remains with the operator (reducing churn) and extend the total value of sales that the customer generates in both postpaid and prepaid environments. Being able to offer a range of "sticky" value-added wireless data services based on SMS lowers the probability that the customer will churn.

The Interactive Messaging Explosion

Person-to-Person (P2P) messaging was largely stimulated in North America last year with the CTIA-led initiative surrounding intercarrier messaging. Once it became possible for subscribers to originate a text message from one wireless operator's network and deliver it to a friend/colleague on a competing network, regardless of underlying network technology, the communication barrier was broken and the rapid explosion of text messaging in North America had begun.

It is a development that many people were skeptical about a few years ago. Nevertheless, the average use of SMS-based messages grew from an average of 10 to 25 messages per user/month in just one year and that was the beginning. According to Tom Wheeler, president of CTIA, "In the United States, there were 30 million text messages sent in June 2001;1 billion text messages were sent in June of 2002." At the end of 2002 we also saw the unique stimulation of text messaging between the U.S. and Canada with the CWTA and CTIA intercarrier messaging initiative that created cross-border messaging.

In the same way that P2P text messaging overcame the technical challenges of intercarrier messaging and consequently increased day-to-day traffic, the recent advent of interactive SMS services has had an even more dramatic (somewhat unprecedented) effect on the North American wireless market. Although in their infancy in North America, initial interactive SMS services have already seen huge mass-market acceptance across the nation.

More important, P2P messaging sparked a viral education process that has trained the American wireless subscriber to the benefits of P2P "texting" (e.g, "Hey, this phone of mine can be used for more than just voice, did you know that?"). In doing so, the revenue-generating potential of SMS as a new channel for reaching the targets of nationwide mass media advertising has been realized. The key point is that the mobile phone is a personal device that's almost always with an individual--just think of the possibilities that exist in utilizing this channel in the media, advertising, and enterprise sectors alone. The potential is huge.

To date, the biggest success story regarding interactive SMS services in North America relates to the hit television series "American Idol" on the FOX network. At one point, nearly 1,000 SMS messages per second were being processed by the messaging platforms at AT&T Wireless during the voting period after the show--the highest peak of text messaging traffic the U.S. has seen to date at the time of publication. Interactive messaging has an up side for all wireless audiences--media companies attract more viewers and share revenues with operators; carriers benefit from the increased traffic that generates additional revenue; and subscribers enjoy new and exciting entertainment options, and sometimes even win prizes for texting.

Adding an interactive TV component to an overall marketing strategy is one of the hottest topics in the media, marketing, and wireless industries today. It is estimated that messaging applications will generate $2 billion in revenues by 2005, compared to $531 million in 2002, according to a recent report by Morgan Stanley.

Premium SMS-based Services

The price for sending an SMS message has been steadily falling due to increased competition. Wireless operators now need to increase ARPU by deploying premium SMS-based services.

Premium SMS-based services are popular, value-added services that are priced higher than normal SMS-based traffic. This, combined with the popularity of these services, means that they represent a very large earning potential, both for the respective operators and the content providers.

Some of the types of services that could be available from network operators and service providers through value-added SMS, including premium-rated content, are:

* Event-driven content such as touchdown-by-touchdown football alert for a favorite team, personalized stock information, industry sector news alerts

* Travel information such as localized real-time traffic news, flight/transport information

* Ringtone/media downloads

* Gaming and gambling

* Interactive (SMS) TV

* Location information

Both mobile operators and service providers view the launch of value-added SMS services as a first step in establishing a culture of mobile information services, prior to the introduction of next-generation high-speed data services. Premium-rate SMS can pave the way for those more sophisticated mobile payment systems and can also assist in the process of consumer education on the use of mobile data services. Support for the rapid growth of such services in North America is therefore important.

Charging for Premium SMS-based Services

It's not only the operators who offer SMS-based services; it's also possible for others to offer them, but users of these services are still billed by the operators via their phone bill.

Services that are run by external companies are priced higher than the services typically offered by the operators. These higher-priced services will cost between 10cents and $1 per message, depending on the specific service. The services are based on revenue sharing between the respective operators and the content providers. When customers are charged via their phone bill, the operator retains a certain percentage of the sales and the remainder goes to the content provider.

The pricing of premium-rate SMS messages is typically organized according to several different criteria, which determines both the price and the revenue-sharing relationship between operator and content provider. These categories will most likely be established by the North American operators in conjunction with the rollout of common short codes.

How Long Is a Short Code?

In March 2003, members of the SMS Forum demonstrated the use of Application Service Codes (ASC)--aimed as a catalyst for SMS service growth in North America. These ASC codes allowed SMS messages to retrieve information from applications. Making the Service Codes universal (through association with toll-free 800 numbers) allows the same code to be used from different networks and operators, thereby greatly increasing their value to brands and media. This initiative was intended to encourage the deployment of SMS services to subscribers such that the service is available regardless of the subscriber network.

More encouragement followed, also in March 2003, when for the first time in North America, five major wireless carriers--AT&T Wireless, Cingular Wireless, ALLTEL, Nextel Communications, TMobile, Western Wireless, and Cellular South--agreed to utilize a common short code (7827 or "STAR") to interact with USA Network's "Nashville Star" and vote for the next country music sensation right from their mobile phones using text messaging.