Messaging Services To The Rescue

Short messaging services should help the mobile phone market gain momentum next year

By Ari Bensinger

New subscriber growth in the mobile phone market is being hampered by reduced operator subsidies and higher overall penetration rates, particularly in Europe and Asia. Third quarter global mobile phone volumes declined by about 10% to approximately 91 million units, primarily due to a weak upgrade market in Europe.

Overall, the worldwide mobile phone market is expected to decrease about 5% in 2001 to an estimated 400 million units, versus a 44% increase in 2000. The lack of killer applications for Internet enabled phones has hurt the handset replacement cycle, as customers are less prone to upgrade to newer phones. Compounding these factors is the rapid economic downturn in the U.S.

Future growth will be highly dependent on the rate at which new wireless products and services are developed and launched. One wireless technology that promises to spur future growth is short messaging services (SMS), or text messaging. At an average price of about $0.10 a message, SMS is currently the dominant data contributor to carrier's average revenue per subscriber.

LOW COST, HIGH MARGINS. SMS enables users to receive data as text through a wireless phone. SMS traffic operates completely outside the voice band, as it is transferred over the packet-switched signaling channel of the network. As such, SMS messages can be sent and received even during a voice call. SMS offers a quick, cheap, always-on alternative to wireless voice messaging.

The vast majority of SMS usage is accounted for by consumer applications, particularly for social messaging or chatting. Most carriers offer SMS information alerts that can be delivered to your phone at regularly scheduled intervals. Subscribers typically register with an Internet site or portal in order to receive specific information. The most popular SMS services available are weather forecasts, news, sport scores, stock quotes, horoscopes, and email alerts that notify your wireless phone when you receive an email message.

SMS is extremely cost effective compared to the cost of airtime for voice calls or for wireless web access. Messages can be received while making voice calls and there are no busy signals to contend with. SMS is also silent and discreet - perfect for situations where a cell phone call is inappropriate. Unlike standard wireless voice mail messages that require access numbers, text messages are directly delivered to your cell phone. On the other hand, SMS messages are limited to only a few hundred bytes, or about 160 characters, and are difficult to type on the small cell phone keypads.

SMS BOOM. There is no doubting the initial success of SMS. In just two years, the number of SMS messages sent worldwide has grown from one billion messages per month in April 1999 to an average of more than 16 billion messages per month during the first quarter of 2001, according to the GSM Association.

Overall, more then 50 billion SMS text messages were sent over the GSM network in the first three months of 2001. The market has grown rapidly, despite little proactive marketing by network operators and phone manufactures. Networks are on track to exceed the Association's forecast of 200 billion total global text messages in 2001. With the advent of more content graphics and bigger terminals displays, text-messaging use is expected to accelerate to even greater levels.

The majority of SMS traffic is centralized in Western Europe and Asia. According to market research firm IDC, in Western Europe alone, 82 million subscribers will send 57 billion messages in 2001, versus 25 million and 11.9 billion messages sent last year.

The North America text messaging market has lagged behind Europe and Asia, mostly due to interoperability barriers between network operators that limit subscribers to SMS texting within their providers network. For example, subscribers cannot send SMS messages between the networks of Sprint and AT&T Wireless. Despite interoperability issues, SMS is beginning to catch on in the U.S. - research firm GartnerGroup Dataquest predicts 1.4 million U.S. users will be messaging on their mobile phones by the end of they year. By 2004, Gartner expects 15.6 million wireless text-messaging users.

A WAY TO PLAY SMS. Although growth in the mobile phone industry has slowed from its robust levels in prior years, the long-term picture for the sector remains bright, due to the eventual transition to Internet enabled phones. Wireless data applications and services, in particular SMS, should help the mobile phone market gain momentum in 2002.

With an estimated 30% market share in the enhanced telecom services market (an estimated $4 billion industry), we believe Comverse Technologies (CMVT ; 3 S&P STARS, hold) will be a long-term beneficiary from the rapid growth in text messaging. Comverse enjoys a broad customer base, with over 370 carrier customers, including 14 of the top 20 telecom carriers in the world. We believe the company's real potential will be felt with the eventual evolution from SMS to unified messaging.

Bensinger is a telecommmunications equipment analyst for Standard & Poor's

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