Is 3p the Right Solution?
By Wendy Grossman, Mon Mar 12 00:00:00 GMT 2001

Developing a billing strategy that is sensitive to the cultural inclinations of the end-users is going to be a challenging task for the mobile network operators.

According to the Mobile Data Association, nearly a billion SMS messages were sent in January in the UK, almost double the 500 million sent last June. If you take as a representative price the 10p per message that Vodafone charged on my last bill, that's a 100 million pounds a month business.

In January, the UK's five wireless carriers agreed to charging each other roughly 3p per message routed between networks. The immediate result probably won't be added costs for mobile phone users, as expectations are that the charges between the large operators will effectively cancel each other out. Instead, the first impact will be - is being - felt by people who use free Web-to-SMS gateways.

SMSBoy shut down their free Web-to-SMS services, as did Totalise, which was carrying roughly 150,000 messages a day. Mobile connection specialist Xtempus, on the other hand, has taken advantage of the new era to set up a service to offer companies sending large volumes of SMS messages least-cost routing via a variety of European operators.

The general feeling when the announcement was made was something along the lines of: Are the network operators insane or just greedy? Why would they want to risk crippling their fastest-growing product, a favourite in the youth market that everyone's trying to attract, by charging each other to carry text messages? Anyone who has come out of the Internet culture would hold that if you have a product that is seizing the public imagination, what you do is keep it free to encourage experimentation and mass adoption. Get 'em hooked, *then* charge them.

Smart Cooperation

A major reason the Internet has developed with the speed and ferocity it has is that in general carrying traffic has been on a cooperative basis - I'll carry yours if you carry mine. That underlying economic structure allowed small ISPs and free email providers to flourish. It's why sending an email message to Athabasca costs no more than sending one to the house next door and logging onto a Web site in Beijing is the same as logging onto one in Brisbane.

One minor flaw to this view: a lot of people involved in Internet businesses are losing money (though of course not all). That is the lynchpin of the case for the defence, so to speak. According to Tony Lavender, a principal consultant with the London-based market research company Ovum, therein is the rub. "I think it's right that between networks will cancel each other out, just like interconnecting voice calls," he says. "I think it comes down to actually costing them money now to handle those messages.

Originally the capacity was spare in the network, but now they're handling huge volumes of messages. So one could say, perhaps, that the people who were sending messages from the Web were actually getting something for nothing." Perhaps, but with no working system of micropayments in place, there is no mechanism for a Web site to effectively charge 3p per message to all comers; however, existing phone services such as Callserve could certainly enter this market.

But SMS - like the Web - isn't finished. We are only beginning to see what it could be useful for as it moves out of the youth market and into the mainstream. There are the usual suspects: user-specified stock price alerts, sports scores, news headlines. But there are also some genuinely useful possibilities, just beginning to happen: late-breaking updates on flight and train times, for example.(Unfortunately, some of the obvious uses are really unpleasant. I got my first SMS ad the other day - from Vodafone, informing me that I could download extra ringtones for my Nokia phone from the Web site. I emailed back roughly along the lines of: I don't care. I never want to hear from you again. If I do, you've lost a customer. No reply. If you haven't had this happen to you yet, guess what? SMS ads are incredibly intrusive, as bad as telesales calls, much worse than junk email or fax. But I digress.)

No free lunches

Ultimately, charging for SMS is only one piece of a much larger question of what kind of pricing structure telecommunications are going to have. As Lavender argues, the network operators may be looking forward. "None of the services for GPRS or 3G are going to be free, especially with the massive investment needed - and in today's market the investors are breathing down their necks." Ultimately, the problem is that "The difference betwen mobile networks and fixed networks is that there are a lot more capacity constraints."

Even so, we know how this worked on the Internet. The earliest online services, such as CompuServe and Prodigy, were profitable running proprietary systems charging per-minute fees, but were more or less killed when the Internet came along with its cooperative economic structure, open standards, and flat fees - when online use really took off. While it's always seemed to me true that WAP service providers could get away with charging for really streamlined, time-saving services, Internet users have been extremely resistant to paying by the minute, by the byte, or by the message. Bridging that cultural gap is going to be extremely difficult.

It's true that there are vast swathes of mobile phone users who have never used the Internet, and so have nothing to compare their expensive mobile access with. But that will only save the network operators for so long. Eventually, it seems to me that the most likely is that all telecomms and Internet connections will converge on flat-rate pricing.

You can see their dilemma. Carrying SMS messages for free opens the way for alternative providers to piggyback on their system and eventually provide ways of by passing the charging mechanism entirely. The Internet experience both proves and disproves this: users are constantly migrating to free services at the expense of paying ones; on the other hand, the free services greatly expand the market for everyone.

In terms of developing the mobile Internet, SMS can do two things for mobile operators. First, it can connect the fixed Internet to mobile phone users, to the benefit of both. Second, it can provide a testbed to allow network operators to get an idea for what WAP might actually be good for when the high-speed infrastructure is in place to make it usable.

By blocking off free messaging from the Internet, network operators are maintaining the "walled garden" approach that they believe is going to let them charge mobile users for the kinds of services Internet users expect to get for free. But they may be merely delaying the inevitable. Letting the free part of the experiment continue longer might have been the smartest - and, in the long term, cheapest - idea.

Wendy M. Grossman is a freelance writer based in London, and author of net.wars .