Drop In Texting Heralds Industry Shift

A steep drop in festive Christmas and New Year text messaging this year was the latest sign of the decline in such traditional business for telecoms operators in many European countries.

Analysts have warned that the risk of falling revenue to certain European groups from this longer-term drop in text messaging is still to fully materialise. The role of texting is quickly being replaced by social media, email and instant messaging, underscoring the growing urgency for telecoms companies to find ways to profit from data provision.

Citigroup said that the decline in Christmas texts – traditionally one of the busiest days of the year – was steepest in markets where SMS was adopted the earliest, such as Finland, which suffered a drop of 22 per cent, according to data it cited from Sonera, the Finnish telecoms company. Even so, it said that the trend was evident across Europe.

"The true impact of changes in behaviour around Facebook, Twitter and Apple's latest move to provide automatic text rerouting through iMessenger have not yet been felt," says Simon Weeden, analyst at Citigroup.

SMS revenue was about 14 per cent of mobile service turnover in the third quarter of 2011, according to Citi, but in the medium term it expects most SMS traffic to move to the internet or be included for free in bundles.

This is already happening in countries such as the UK, with operators such as Vodafone moving to tariff packages containing unlimited SMS. Texting has become a feature of the contract rather than a split source of revenue.

Even so, there is still a significant exposure in the industry as a whole, Mr Weeden warns, with companies at most risk in the next 12 months including Belgacom, KPN and Telefonica. More broadly, the typically high-priced pre-paid markets such as Spain or Italy are at most risk of seeing revenue fall. The effects are already evident, with a profit warning last April by KPN, the Dutch operator, in part blamed on voice and text decline.

Texting is not just for Christmas, of course. But this recent drop reflects a structural shift in the industry away from traditional business such as voice and SMS towards the provision of data services and applications.

The popularity of the iPhone and similar smartphone devices has meant that the quality of voice calls is no longer the priority for many consumers as they buy a phone equally for access to the internet.

With this connection, customers can use messaging programmes such as Skype and WhatsApp, social media platforms such as Facebook and Twitter, or even just email. Instant messaging in particular generates very little data traffic, which means that it effectively does not cost telecoms companies anything to provide it.

Apple has also rerouted texts from iPhones on to its own iMessaging system when sent to other iPhone users, which Citigroup predicts will have its biggest impact in 2012 following the launch of the iPhone 4S model at the end of last year.

However, the industry does not control revenues generated from such services and there is debate about the best way to make the provision of third-party applications pay, given the capital expenditure needed to provide the network infrastructure.

Etno, the lobbying body that represents European operators, last week acknowledged that revenues from traditional fixed and mobile voice products were in decline. It said that European telecoms operators would need to develop business models to generate revenue streams from the continued increase in networking sites that offer rival, and often free, means of communication.

Many operators privately acknowledge that their future depends on taking a share of the profits in the provision of data. One chief executive of a large European telecoms company, who wished not to be named, predicts that it will not be too long before voice calls and texts are given away for free as customers sign up to data bundles for their phones.

Ghassan Hasbani, international chief executive of STC, the global telecoms group, says: "Voice and SMS are moving to data. The entire market will shift in the next years entirely to being led by data."

Operators must now work on how to price services to meet changing consumer demand as business strategies predicated on revenue per minute and revenue per SMS become obsolete by the fundamental shift in technology.

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