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The next mutation of mobile messaging
By Tero Kuittinen 5/11/2006
Mobile operators have a lot riding on mobile-data revenue growth.
It is supposed to offset the rapid erosion of voice-call revenue and become the key sales-growth driver over the next five years. But investors have not been convinced by the mobile-data story so far.
Share prices of Sprint Nextel (S, news, msgs) and Verizon Communications (VZ, news, msgs) have underperformed mobile-hardware names like Qualcomm (QCOM, news, msgs), Texas Instruments (TXN, news, msgs), Nokia (NOK, news, msgs), Motorola (MOT, news, msgs) and LM Ericsson (ERICY, news, msgs) conspicuously over the past 12 months. The 12-month performance of BellSouth (BLS, news, msgs) has edged ahead of Ericsson due to the recent scare in the mobile-network sector, but overall, the markets have been notably skittish about operators.
Is the investor fondness for hardware names over service providers really warranted?
Could stocks like Sprint, Verizon and BellSouth be poised to reverse some of their relative underperformance over the next year or two?
Related news and commentary on MSN Money
New approaches to messaging
Much will depend on mobile-data revenue trends. Since the beginning of 2006, new threats to the established mobile-messaging market have started to emerge.
Since the CTIA meeting of last month, I have been reviewing fascinating new IP-based messaging services for mobile phones launching this spring and summer.
Privately held companies like Hotxt, EQO and mPortal are creating new approaches to mobile messaging -- perhaps paving the way to photo- and video-swapping. And this may prove to be a tough challenge for operators who have benefited greatly from technologically stagnant, relatively expensive, high-margin text-messaging.
Text-messaging revenue is the foundation of the mobile-data market. The most popular of the mobile-messaging technologies, the Short Messaging Service (SMS), has remained surprisingly stable over the past 15 years -- yielding 70% to 90% profit margins for operators even as voice margins have declined sharply. This fat mobile-messaging sector may face a fierce assault over the next two years.
The argument in favor of operators is that the data revenue will soon be big enough to stabilize the negative impact of softening voice revenue. The argument against operators is that the data revenue may not grow rapidly enough to offset the voice revenue erosion.
Cingular's first-quarter results reflected the state of mobile operators in general.
Overall, average revenue per user (ARPU) declined 2.3%, but mobile-data ARPU soared by 41%. Cingular's overall ARPU is now about $48, and the data ARPU is coming in a tad above $5. We are now close to the inflection point at which the rapidly growing mobile-data slice of the overall ARPU will become big enough to bring the overall ARPU decline to a halt. Unless something unexpected happens.
"Mobile data" is a term that spans text-messaging, ring tones, games, music distribution and screen savers. But plain old text-messaging still makes up most of mobile-data revenue for all major operators, and that's a potentially unstable situation.
Over the past five years, plenty of novel mobile applications have been launched -- from games to sport-clip downloads. But these high-end mobile data services have not been able to displace plain old text-messaging as the primary mobile-data cash machine. The highly profitable SMS is a technology originally conceived in the late 1980s and never intended to become a mass-market consumer product. As a result, it's a relatively archaic product. Message length is limited to 160 characters, time between sending and receiving a message can be minutes, and text messages aren't presented as a running dialogue, as they are in instant-messaging services.
The challengers emerge
The variety of new IP-messaging services that are coming will begin staging a challenge to old-school text messaging. Most of the new services are viral in nature. They don't boast heavy marketing budgets or instant mass consumer appeal. They typically demand downloading an application to your mobile phone and porting or creating new contact lists -- tasks that most consumers tend to abhor.
But the new wave of mobile IP-messaging offers considerable cost savings and taps into the MySpace zeitgeist of combined messaging and community-building. The remarkably rapid success of YouTube viral video service on PC Internet is a tantalizing clue of where the mobile-content industry might veer next. If the new mobile instant-message services can persuade consumers into downloading novel low-cost messaging services onto their phones, the next step from there to photo- and video-swapping is relatively trivial.
Breaking down the consumer resistance to downloading applications has been the key challenge to the mobile-content industry over the past half-decade. But the new IP-messaging services possess a powerful lure of cheap, appealing instant-messaging access. They bypass the old text-messaging framework of mobile operators, tapping into new mobile-data technologies like GPRS or 1xRTT. Using IP infrastructure for messages cuts the price of mobile messaging by 80% to 95%, depending on operator and messaging frequency.
The new wave
The brand-new Hotxt messaging service in the U.K. costs a pound a week and pushes the cost of a single message below 1 penny, from the 5-10 pence level that the average consumer spends on a text message.
The Canadian start-up EQO is positioning itself as a kind of mobile Skype -- routing mobile voice calls via Skype service and offering a very slick Mobile Instant Messaging application.
The American company called mPortal offers an interesting twist to stand-alone IP-messaging services. It bundles a novel messaging system into all phones used by the upcoming Disney (DIS, news, msgs) mobile-phone service. This averts the need for downloading an application and creates an instant mini-community of the household that opts for Disney mobile service. Virtual operators may well become one major force driving early adoption of IP-messaging services.
I've talked to all three companies, and they offer an interesting snapshot of the first year of mobile IP messaging.
Tero Kuittinen has no positions in the stocks mentioned in this column. He is a senior product specialist for Nordic Partners, a pan-Nordic brokerage firm. Although Kuittinen is an employee of Nordic Partners, the statements above are being made in Kuittinen's personal capacity and are in no way the statements of Nordic Partners, nor attributable to the company. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks.
© 2006 TheStreet.com, All Rights Reserved.
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