A Shortsighted Love with Short Messages

Cash-starved European telcos make such good money from this simple service that they may be reluctant to push the much snazzier 2.5G

By Stephen Baker

Microsoft executive Vassili le Moigne recently came to my Paris office bearing fresh croissants and macaroons -- and a couple of Microsoft-powered Smart Phones. Le Moigne, who heads wireless services in Europe for the software giant, wasn't trying to sell me on the phones (much less the baked goods). No, he came to show me some very simple data services.

Le Moigne pulled out a colorful little phone (it's not on the market yet, due to tech delays) to show me his e-mail messages. The logical way to check e-mail, of course, would be to log onto the mobile Internet. But the European industry isn't promoting services that require a mobile Net connection. They're banking on the much more primitive short text messages.

After investing billions in wireless technology, why the emphasis on simple text messages? For nearly two years, the phone companies tried to sell 200 million consumers on a wireless Web that was utterly baffling. Now, the chastened, debt-weary telcos are convinced that users won't try any data service if it's more complicated than making a phone call. And Microsoft, of all companies, is out to make money from rock-solid simplicity.


  I've been to the U.S. recently, and most folks there find the idea of typing a short message on a phone and sending it utterly bizarre. But in much of the world, it's all the rage -- especially among kids. I'm told that at parties here in Paris, high-schoolers hunch over their phones and send messages back and forth to friends in the same room -- at a cost of about 15 cents each.

For a hurting phone industry, this blizzard of short messages is manna from data heaven, accounting for about 10% of mobile-phone revenue. And since these messages cost the phone companies almost nothing to manage -- it's the users who create and send the content -- the profit margin is quite high. For every megabit transmitted, phone companies bill for more than $1,000.

So it's no surprise that Microsoft has moved to hitch its Hotmail service to this money machine. After all, almost everyone has a mobile phone, and 24 million Europeans have Hotmail accounts, so it's just a matter of pushing Hotmail out to the cell phones. Microsoft has signed up Spain's Telefonica and Germany's T-Mobile. The service is barely under way, with the number of users only in the thousands. But more announcements, le Moigne says, are coming soon.


  The e-mail service isn't quite as simple as advertised. To get his mail, le Moigne had to send a request to the mail server, which sent a message back with a list of new e-mails. Le Moigne responded, asking to see the second one. A few seconds later, there it was. That's four messages, or about 60 cents, to get a glimpse at one e-mail.

And even then, you might not be able to read the whole thing. Short messages top out at 160 characters, so for a long message, the service gives you the option of just reading the beginning or having the whole thing delivered in segments -- each carrying its own charge. To read an e-mail as big as this column could easily cost as much as a steak and a half bottle of decent Bordeaux at a Paris brasserie.

Worse, the Hotmail service isn't nearly as easy or convenient as using the popular BlackBerry mobile e-mail device. Hotmail does have its advantages, though. It can work with every one of Europe's mobile phones -- no need to buy another one. And short messages, for all their limitations, are clearly something the public appreciates.


  Which brings us to the central problem facing Europe's phone industry. Struggling under billions in debt, the telcos need every single cent of revenue. Analysts estimate that messaging makes up about one-third of European phone companies' wireless profits.

Meanwhile, the industry is quietly rolling out the next generation of the mobile Internet, a faster service known as Generation 2.5, or 2.5G. But they're barely promoting it, because if le Moigne reads his e-mail on 2.5G, he's not sending and receiving a series of billable text messages. He's online.

Sure you can charge him something for exchanging packets of data with the mail server, but it won't come to anything like 15 cents for 160 characters. Not even close. This means that the adoption of 2.5G could eat into the short-message business.


  Here's the irony: The phone companies have spent billions to build the wireless-data network of their dreams. They've bet their very existence on it. Yet to service the debt for this project, they're selling a primitive messaging system that could well delay the adoption of the new technology. Instead, with the help of companies like Microsoft, they're gussying up a neolithic service to handle the work of the wireless Web. They're like restaurateurs who finance a plush new eatery with an improvised hot-dog stand -- and now they're thinking the wiener business ain't half-bad.

The irony doesn't end there. At the turn of this century, the Continent had a chance to lead in this crucial new Internet technology. Now, in their hunger for cash, they're stepping aside. Competitors may well come along -- from Japan, America, or even from niche markets in Europe -- and really fulfill the promise of the wireless Web. If that happens, Europe's phone giants will be playing catch up in the revolution they were supposed to lead.

Baker covers the European technology scene from BusinessWeek's Paris bureau

Edited by Patricia O'Connell

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