Savvy mobile consumers are finding better ways to communicate by text - bypassing telecom operators' formerly lucrative SMS offerings.
Analyst firm Ovum says that consumers' increasing use of IP-based messaging services on their smartphones cost telecom operators $8.7bn in lost SMS revenues in 2010, and $13.9bn last year.
"Social messaging has disrupted traditional services, and operators' revenues in this area will come under increasing pressure," says Neha Dharia, consumer analyst at Ovum and author of the report 'The Casualties of Social Messaging.'
Dharia defines social messaging as messaging that occurs through platforms other than SMS, MMS, or email, and which is either tied to a social network or has a social component attached.
For mobile phone operators, text and multimedia SMS messaging has long been their cash cow. Given that texts cost around 12p (depending on the plan), its an astonishingly huge margin on a service that costs next to nothing to run.
Customers are getting wise, and using their mobile data plans to circumvent this price gouging.
Software such as BlackBerry Messenger, iMessage and Skype already offer compelling ways for consumers to circumvent telco's calling and texting charges. But the rise of mobile apps such as Viber and instant messaging through Facebook are rapidly becoming preferred options as the smartphone market matures.Even most mobile software and games, such as Zynga's series of mobile games, all incorporate some form of internal messaging system with a 'push' capability.
Pamela Clark-Dickson, senior analyst at Informa Telecom, believes that the increased penetration of smartphones and the open availability of application programming interfaces (APIs) has created an environment in which the use of mobile voice over IP and IP-based messaging applications is flourishing. She believes that this will cause voice and messaging revenue erosion in 2012 of 3.9% and 1.6% in Western and Eastern Europe respectively.
"The success of OTT voice and IP-based messaging services such as WhatsApp and KakaoTalk has spurred mobile operators into seeking out their own legitimate role in IP-based communications," said Pamela Clark-Dickson, senior analyst at Informa Telecoms & Media.
"Mobile operators are under pressure to continue being recognized by their subscribers as the main provider of voice and messaging services on mobile devices," she said.
In a net neutrality world, telcos can't prejudice one form of data over another to protect their interests, so they're stuck watching the market erode. it's also yet another part of their old business model that has been pushed onto their data networks already straining at the seams. However, Dharia believes this is an opportunity for mobile companies to look at alternative business to replace lost SMS revenue.
"This threat will drive telcos to consider alternative sources of revenue, such as mobile broadband. And now the market has been tested, operators know what types of messaging services work."
"In addition, operators are in a position of strength because they control the entire messaging structure through their access to the user's phone number and usage data. The established billing relationship is a great advantage, as is the fact that operators control to a great extent the services to which the user is exposed," Dharia said.
The mobile world today is facing the same issues that the fixed world has been facing for over a decade - telephone lines are turning into Internet connections and phones are turning into computers. Mobile phone companies are in a bit of a panic, attempting to generate as much cash from the thin margins on their existing infrastructure, before they are forced to begin the rollout of 4G mobile networks next year.
Informa estimates that every 10 percentage points increase in smartphone penetration could cost Western European operators US$1.19bn (£900bn) in voice and messaging revenues and US$306m (£231m) for the Eastern Europeans - between 0.5% and 0.6% of their service revenues from voice and messaging.
Those in the now crowded over-the-top (OTT) IP-based communications market are facing challenges of their own. In addition to mobile operators pursuing their own IP-based communications strategies, OTT providers' services do not interoperate and most do not yet generate meaningful revenues.
Operators are implementing a combination of five different strategies in order to face up to the OTT-communication threat.
"Unfortunately for them, most of these strategies are short-sighted as too much emphasis is given to fighting OTT rather than satisfying their customers," said Dario Talmesio, principal analyst at Informa Telecoms & Media.
"Operators wanting to remain relevant to their customers need to give them internet-style communication services, as voice and messaging as we know it will soon be a thing of the past."