Analysis: Texting Profits at Risk as Users Look Elsewhere

(Reuters) -- Text-messaging has long been a big-time profit generator for U.S. mobile operators, but they now risk losing these profits as consumers find cheaper ways to communicate.

SMS -- short message service -- is no longer all the rage, but it still generates an estimated 12 percent of service revenue for U.S. operators.

Now, with many consumers turning to low-cost alternatives like iMessenger, BlackBerry Messenger and Facebook's mobile messaging service, operators like Verizon Wireless, AT&T Inc and Sprint Nextel risk losing a steady, superbly profitable source of income.

Customers using the new crop of messaging services must still pay for mobile Internet access, but the cost per message is much smaller than a monthly SMS service plan or per text charges, particularly as U.S. carriers charge both the recipient and sender.

U.S. operators still carry a lot of text messages on their networks, but they are seeing warning signs ahead.

I do expect SMS to be under attack, Verizon Chief Executive Lowell McAdam told the audience at an investor conference in December, noting that some European carriers have already seen texting alternatives hurt their financials.

In particular Dutch operator KPN blamed the messaging services of social networks such as Facebook and Twitter for a dramatic drop in text messaging revenue in 2011.

In South Korea one alternative service, Kakaotalk, now handles 30 billion messages a month, eating into traditional texting traffic at the country's three mobile network carriers including SK Telecom.

Every major wireless operator is seeing some substitution for text messaging, said Mark Lowenstein, the head of wireless consulting firm Mobile Ecosystem.

Craig Moffett, an analyst for Sanford Bernstein, said carriers have a huge cause for concern as he described text messaging as the most profitable service known to man.

At current rates SMS brings in $1,000 for every megabyte of data transmitted compared with the 2 cents to 13 cents per megabyte generated by a typical wireless Internet data plan, according to Moffett, who notes that this revenue is virtually 100 percent profit.

AT&T and Verizon Wireless have moved to stem a texting revenue decline by eliminating cheaper options for smaller buckets of texts. AT&T eliminated a $10/month plan for 1,000 texts in August and now offers only a $20 unlimited plan or pay-as-you-go texts for 20 cents each.

Verizon Wireless followed suit in November by dropping a $5 per month plan for 250 texts. It offers a $10 plan for 1,000 texts a year on top of its $20 unlimited plan.

The push toward higher service fees may end up backfiring and hastening a move to alternatives, as consumers have become particularly vocal in their rejection of fee increases. Verizon Wireless ended up abandoning a new $2 payment fee last week after a consumer uproar.

They risk alienating a certain portion of their subscriber base by forcing them to pay for higher-priced unlimited tariffs particularly if they don't provider a more affordable option, said Informa analyst Pamela Clark-Dickson.

SAVED BY FRAGMENTATION?

One saving grace for operators could be the fact that alternative texting services are so fragmented. For example, only BlackBerry users can send or receive BBM messages.

The same goes for iMessenger, a messaging service that is exclusive to users of Apple Inc's iPhone. Unlike BBM, which requires users to open a separate app, iMessenger is integrated into the iPhone's texting message.

This means that a text to a non-iPhone user is automatically sent via the traditional channel, but a text to an iPhone user will go via iMessenger and circumvent the carrier fee.

While services such as Facebook and Twitter work on all smartphones, many consumers may keep paying for traditional text messages if they want to continue to text with people who have a different phone or service.

It is true that traditional texting did not take off in the United States until operators agreed to work together so consumers could exchange texts with friends on rival networks.

According to CTIA, the U.S. mobile industry trade group, texting volume rose from 930 million in June 2002 to 1.5 billion in the same month a year later after interoperability.

So unless companies like Apple and BlackBerry maker Research In Motion agree to interconnect their services, there will also be some traditional texting fees for operators.

Until that point when it becomes interoperable the issue is going to be somewhat contained, said Soumen Ganguly, a consultant at Altman Vilandrie who is doubtful these companies will ever agree to interoperate.

However, even without interoperability, alternative services are gaining ground. BlackBerry Messenger, for example, has become so popular in the UK that police said it was a key tool used by rioters in London during an outbreak of violence in August and they even considered seeking permission to suspend the service in times of civil unrest.

Despite market fragmentation many consumers are figuring out ways to avoid texting fees entirely, analysts said.

If we're not there now, we're very close. For lots of customers they're already there, Moffett said. So if raising prices is not the answer, what can carriers do?

It may not be there's much they can do. The Internet has done this to lots of business, he said.

(Reporting By Sinead Carew, additional reporting by Nicola Leske in New York and MiYoung Kim in Seoul; Editing by Steve Orlofsky)