Why Over The Top Messaging Is Mobile's Newest Monetization Platform

Joe McCann

Text messaging. Remember that? Of course you do. You probably text people on a regular basis. Mobile Network Operators (MNOs) have benefited from this asynchronous form of short messaging for years and have collected hefty revenues from it as well. In fact, Portio Research estimates SMS revenues will top $150 Billion this year alone. But MNOs aren't they only ones benefiting. Texting has led to all types of uses beyond just communicating with another person; it has led to branded campaigns, voting and of course spam.

However, as MNOs start to enter the third phase of the sigmoid or S-curve growth model as service providers, SMS in many markets is starting to enter the detrimental "substitution" stage of decline where users are finding new, better and cheaper alternatives to SMS, namely Over The Top (OTT) messaging providers such as Whatsapp, Kik, Snapchat and even Facebook Messenger along with a seemingly endless array of other OTT apps. According to McKinsey, users in South Korea and The Netherlands have already tipped away from SMS where the move to OTT messaging apps is having a material impact on the MNOs SMS volumes and revenues. Essentially, people are texting so much less that it is impacting the MNOs' business.

What's even more stunning is that in 2012, OTT traffic actually eclipsed the total amount of SMS traffic and is on pace by the end of this year to more than double the aggregate amount of SMS traffic. Why such a massive shift in the way people are messaging?

OTT Exponential Growth Story

There are many factors attributing to the growth of OTT message traffic, but at its simplest level, it's free in cost, free of spam (currently) and there are loads of options.

Here are just a handful of OTT messaging apps:

The number of options is great for users, but what's even better is the price, free, especially in our globally connected, roaming-charged world. Before OTT apps existed it would cost me an arm and leg to send to send an SMS to my friend Nikolai in Amsterdam. What's more, given the extreme fragmentation across the European Union's mobile networks, sending a text from someone in The Netherlands to neighboring Belgium was also quite expensive and soon a market demand for an alternative to texting was clearly established.

Enter Whatsapp (or Kik or Voxer or the OTT app du jour). Send messages, similar to SMS and MMS, but solely relying on your data access, which means, it works when connected to WiFi as well as your 3G or 4G data service from your provider. After you've verified your number you can connect with friends from your social networks or look them up by their phone number. It's all the benefits of texting without any of the cost and potentially, given your OTT app of choice, additional value-added services and features that SMS and MMS do not provide, such as group messaging, "walkie-talkie" style voice message, etc.

But OTT messaging is not just a substitution for SMS; it has the potential to be a completely new communication and monetization platform altogether.

OTT Messaging More Than Just Messaging

WeChat, owned by China's largest internet company Tencent, recently opened up a new revenue service inside their messaging app. Chinese users now can pay for purchases at McDonald’s directly within WeChat. Any user that follows the official WeChat account of McDonald’s China can find an e-coupon for an afternoon tea deal. The user can make a payment with Tenpay (owned by Tencent) or any number of other online payments services offered by Chinese banks without leaving the WeChat app. Users receive a WeChat message with a QR code for redemption at a participating McDonald’s store.

The ability to use messaging as a payment medium is innovative.

Line, launched less than a year ago and already touting 100MM users, has created a game platform inside their messaging app. Users can both download the same app in the context of Line and play against each other.

The ability to use messaging as a gaming platform is novel.

Kik, an OTT messaging app clocking in over 50MM users, has created an entire app development platform where not only games are possible, but any type of app built in HTML5.

The ability to use messaging as an app platform is remarkable.

All of these value-added services and features that SMS does not possess, poses an ever greater risk to SMS as the dominant messaging medium, particularly with younger generations of smartphone users who are playing more games and being more social than adults accustomed to SMS.

The Risk and Opportunity for MNOs

As previously mentioned, The Netherlands and South Korea are already experiencing a material impact on their messaging revenues and are struggling to substitute new value-added services to make up for the lost revenues from lower SMS volumes.

But the risk is much greater than losing revenues on just messaging; the biggest risk for MNOs is eventually becoming dumb pipes for data access.

MNOs are now in a position where they could end up like utility companies -- very high reveneues but relatively low, albeit consistent profit margins, in the 8-12% range.

In order to avoid becoming like your local electric company, it is imperative that these traditional slow-moving behemoths, become more agile in not only their internal processes, but their product and service development styles as well. Regulators in the US are asleep at the wheel and in no way have the ability to keep abreast and certainly not ahead of innovation in the mobile services space. This is an opportunity for MNOs to experiment with a number of value-added services that can be properly bundled on top of the access that they currently and will continue to provide.

Advertising, financial services, healthcare, security and cloud computing and storage services are all opportunities where MNOs can experiment with little regulatory oversight or restrictions. Moreover, there are already other disrupters in these areas (Google and Facebook in advertising, for example) so some joint partnerships amongst MNOs to provide competitive services seems imminent. Verizon alone can't compete against Google in the ad space, but Verizon and AT&T together can. There is strength in numbers and MNOs need to start taking advantage of this.