SMS is far and away the richest source of messaging revenues for operators. Now the Internet revenue model may unleash exciting new revenue potential for SMS.

SMS stats are mind-boggling. The number of SMS messages sent annually are counted by the trillions, and annual revenues are tallied by the tens of billions of dollars. Person-to-person messaging accounts for the lion’s share of SMS revenue generation.
Due to the enormity of scale involved, increases in SMS usage and in profitability can have great significance to operators.
Ad-funded SMS has the potential to cause such increases.

The Successful Internet Model and Its Influence on Mobile Users
The Internet, which influences many aspects of life, is having a significant effect on consumer attitudes and behavior. Typically, Internet users pay a monthly access fee for unlimited use. This payment model has implications in the mobile phone arena, including the willingness of users to pay each time for everything they use.

Internet-influenced pricing models for users are leading to interesting developments in the SMS market. For example, operators experimenting with pricing plans that permit unlimited SMS messaging are discovering that allowing their users to use SMS as much as they want is one way to encourage the use of more SMS services.

The Internet is “ad funded” which means that users see advertising and in return get to use services for free. This successful paradigm is spreading to mobile phone service — and perhaps surprisingly, this is a development that is welcomed by many users. As advertising becomes an integral part of the telephony environment, there are few signs of consumer opposition. Just the opposite: market research shows that consumers are willing, and in some case even eager, to have ads on their phones (1).
What causes the generally positive consumer attitude towards advertising?

Free! How Cool Is That?
One of the most important reasons for the apparently positive consumer attitudes towards mobile advertising is the positive experience of the Internet — particularly email. PC email created a free and attractive alternative to ground mail, for which postage had to be paid for every item sent. Email, instant messaging and other Internet services enable people to send unlimited amounts of text, voice and multimedia messages without paying a penny.
Is PC communication really free? Well, not exactly – there is a cost: acceptance of advertising. Over time, users have become comfortable with the model in which communication can be free when sponsored by advertisers.
So why not apply the same successful formula to SMS?

Freedom to Choose
It is said that there is no such thing as a free lunch — but things change. It is now more accurate to say, “There is such a thing as a free lunch – you just may have to glance at a sales pitch when you receive it.”

A good example of ad-sponsored service from outside of the Internet realm is TV. Viewers can choose two kinds service:

• Pay TV: Select and pay for channels which are advertisement free (on cable or satellite)
• Free TV: Broadcasts are free, but there are commercials

Just as TV viewers can choose which type of service they want, the idea of having a choice is also attractive to mobile phone users. Market research conducted by Market Watch confirms that SMS focus groups strongly endorse the idea of having a similar choice between:

• Pay SMS: Traditional pay-to-send SMS
• Free SMS: Ad-Funded SMS, which can be discounted or offered free of charge

Ad-Funded SMS can subsidize SMS messaging by inserting advertising text into SMS messages in space left unused by the message sender. The advertising is not intrusive and does not interfere with the reading of the message. The youth segment actually expresses strong interest (I want it and I want it now!) in getting such a service in return for the benefit of reduced-price or totally free SMS messaging.
Because the user freely chooses the service, advertising is fully accepted.

Attractive Arena for Advertisers
Operators can gain a new set of paying customers: advertisers.
Advertisers are prepared to put money on the table for mobile advertising because of the many advantages inherent in the medium, including:

• Personal: SMS bears highly relevant and interesting personal messages sent one-to-one (e.g. between friends, family members or business colleagues). These messages are generally read with keen interest. Ad-Funded SMS promotions thereby benefit from excellent placement.


• Precise: Sponsors can target their market with precision (based on age, location, key words in the text, etc.)


• Enables Easy Response: Ads can be interactive, users can respond impulsively and directly to offers with a one-key click-thru capability


• Provides Accurate Assessment: Advertisers can accurately measure the response to click-thru offers and evaluate the effectiveness of campaigns

Everybody Wins
Ad-Funded SMS benefits from a win/win/win scenario:

• Users: From the user point of view, the primary attraction and benefit of Ad-Funded SMS is that it provides a way to drive phone expense down, enabling users to message freely without worrying about the cost.


• Advertisers: Sponsors can gain a new and effective way to promote their products and their message directly and interactively with carefully chosen target groups. The target groups are captured audiences and most likely to be massive groups of people, i.e., more than the sponsor would have reached by other means of promotions.


• Operators: The key advantage to operators is that they can gain a completely new paradigm for revenue generation. Instead of having to derive all call revenue from user tariffs, operators now have sponsors footing the bill. Because users pay little or nothing for SMS, messaging volume and customer satisfaction can be higher, yet the operator still gets paid in full (or even more) for each message sent.

Added Benefit from the Ping-Pong Effect
Operators gain additional benefit from the ping-pong effect.
Personal SMS messages frequently elicit a response from the other party. If the number of messages that users originate increases as a result of the removal of cost inhibitions, then the number of messages sent back can also increase (like a ping-pong game) in a proportional manner.

As a result, the revenue that comes to the operator from SMS traffic can increase geometrically.

Great, Why Not?
For users, Ad-Funded SMS can be an exciting development, allowing them to send SMS messages at no cost. Ad-Funded SMS can create a winning proposition all around: end users can send SMS with no cost; operators can gain a new revenue source, advertisers can reach a receptive and responsive audience.
This model could very well be the first big step in a mobile advertising revolution, laying a strong foundation for developing additional revenue sources for operators.

1 | Comverse sponsored focus group research in 2006 with Market Watch (Synovate)

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