Sources of Value in Messaging and SMS

As part of our forthcoming Voice & Messaging 2.0 report we've been researching every innovative new application we can get our hands on, looking for common themes. A skill we think most operators could do more to develop is understanding what the true sources of value are in their products. The problems of MMS are the obvious case in point, but the absence of compelling examples of IMS-based use-cases beyond PSTN replacement suggests a deeper lack of insight as to what creates value and what the telco role really is.

Let me take as an example some work I did for a mobile handset vendor some time ago, decomposing the value proposition of SMS. (You can see similar work for voice services from my O'Reilly Emerging Telephony keynote last year here.) Once you understand how you create value, you're in a better position to create profitable products and partnerships.

The basic misconception is that transport of the bits always constitutes the value of the service, just because that's how we market and bill for it. This results in endless analyst reports with tables like the following (we've made up our own to protect the guilty):

ServicekB consumptionExample PricingRevenue per MB
SMS ringtone/logo0.2 kB$2 (UK)$13,981
SMS message0.1 kB$0.15 (UK)$1,573
Complex ringtone/logo2.0 kB$3 (UK)$1,536
Java download (game)15 kB$3 (Japan)$204
1 min voice call144 kB$0.10 (US)$0.71

Until you run out of spectrum or backhaul capacity there is zero marginal cost of transmission to the network owner, and capacity is a sunk cost that should be ignored. $/Mb is the worst possible metric to run a network by -- particularly as opportunities to offload transmission of "heavy" media onto user-supplied media and networks increases.

Postage and packing costs don't tell you about value. I could post you a box of gold and a box of manure, but the relative transport costs tell me nothing about the postal system or the goods. You only learn about the value of the gold by being told about wedding social customs, mining costs, secure storage costs, central banking institutions, currency issuance and inflationary effects of competing stores of value. You don't learn anything about those by looking at the value of the stamp on the box. All that tells you is gold is heavy, not why the user paid $10,000 for it.

Before assigning value to functional elements of SMS, we need to know what those elements are. In the diagram below, Aino is sending an SMS to Bo. The key components of the transaction are shown: handsets, radio networks, SMS messaging centres, long-haul interconnect, home agents/HLRs, customer database, billing and policing. Remember, the customer sees no value any of these things per se.

(The groovy guy at the bottom is a Brussels bureaucrat who makes sure that every national regulator has in place some means of dealing with nuisance users. He looks rather Walloon to me, anyway.)

Now we overlay some of the value elements:

So what does your 10ยข to send an SMS buy you? Where does the value come from?

  • The ability to enter the information into the handset, tuned for usability of text entry?
  • Is it to have it transmitted and delivered? (Think of the difference between these as being between having the package delivered to your home address and having to collect it from the depot.)
  • How much is attributable to the availability of coverage: the service comes to you, rather than you to it? The universality of the service via interconnect agreements? The ubiquity of the receiving apparatus?
  • The storage of the data sent to sometimes disconnected recipients? The resolution of mobility, delivering to the user wherever they may roam? (Think of this as the difference between a package delivered to your home address and one delivered personally to you.)
  • What value is attached to the ability to cause the recipient's handset to ring and vibrate, indicating urgency to the message? (Do Blackberry users have their devices vibrate with every email? Rarely. Why not?) Every message is billed (or subtracts from a bucket), and thus has cost which would only be incurred if the message has relevance. Without this, how do you know the recipient will bother reading messages?
  • What if the system is abused? Somehow there has to be governance, which in turn relies on some means of tracing malicious users and accountability.

You can almost imagine getting an itemised bill for each SMS, with sub-totals from 3GPP, Verisign, NeuStar, Level 3, the FCC/OFCOM/etc., Nokia and so on.

We've not captured everything here. For example, because SMS messages always go to handsets, and handsets are personal devices with a taboo of fiddling with someone else's when they're not looking, there's a strong privacy proposition. Indeed, this is possibly the #1 driver for teen use -- no parental oversight. Thus a "value-added" combinatorial service that delivers text messages to the TV as well would be value destroying.

Cheap, open IP networks make disintermediation of carrier services possible, but not inevitable. People will continue to use SMS even when offered a free e-mail alternative. This is because e-mail does not have all the value attributes of SMS the customer desires (e.g. governance, ubiquity). It also lacks the economic structure that content and service providers need, such as premium charges to vote in TV reality shows like Big Brother or Pop Idol.

We'll look at some of the consequences of this in a subsequent post.