Will Apple Take a Bite out of Carriers' SMS Revenues? Likely.

How much negotiating power does Apple have in wireless? Enough for Dan Hesse, CEO of Sprint, to bet his company on a partnership with Apple.

Last week the Wall Street Journal reported that in exchange for marketing Apple devices, Sprint agreed to buy at least 30.5 million iPhones over the next few years, at an estimated $20 billion cost.

As astounding as those numbers are, huge volume commitments are only one threat to a wireless operator’s bottom line these days. Another -- and potentially more dangerous threat -- is the steady encroachment of application players into traditional carrier revenue streams.

SMS is a case in point. Apple just released their IOS5 operating system featuring iMessage, a new and FREE messaging service that competes directly with SMS. Embedded in the core IOS5, iMessage will allow Apple users to text each other and totally bypass the carrier’s SMSC platform, a major source of carrier revenue.

How will iMessage Affect SMS Revenues?
SMS revenue is not only important to U.S. operators; it’s a highly profitable money-maker that pays the bills of other services. Craig Moffett, an analyst for telecom research firm Sanford C. Bernstein, claims text messaging generates a whopping $20 billion in annual revenue for U.S. wireless carriers. Verizon Wireless, alone pulls in $7 billion a year from texting, he says.

Apple isn’t the first device maker to get into the messaging game. For several years now Blackberry has offered a similar service to iMessage called BBM or Blackberry messaging. BBM is a completely separate service from SMS which required Blackberry users to monitor both applications. Not the most user friendly experience. Unlike Blackberry, iMessage is a consolidated offering which will determine if the message should be routed via Apple’s path or the Carrier’s SMSC path. If both paths are available iMessage will pick the Apple path. I’m pretty sure iMessage will become extremely popular within the Apple community when you combine Apple’s amazing marketing campaigns and their easy to use application interface.

IMessage could be a much bigger threat because of Apple’s smartphone market share and cultural clout. You can already see a richer user experience within the service with features like delivery notification. I never knew if my SMS messages were properly delivered, but I know today with iMessage. Features like this will do nothing but encourage more people to use the service and increase customer expectations.

IOS5 will support not only later generation iPhones, but also the iPads and the iPod Touch. It’s only a matter of time before Google follows up with an Android-based messaging service. Longer term, a cross-platform solution for Android, Apple, and Microsoft devices could leave carriers wondering “whatever happened to our lucrative SMS business?”

Is Flat Rate Unlimited SMS the Right Strategy?
This is a tough call. I can see how carriers could feel threatened by services like iMessage. Eliminating SMS usage tiers protects the carrier as more Apple users message via iMessage versus traditional SMS. But the reaction could also backfire. With stories in the news about a possible “double dip recession” will consumers opt for any possible way to reduce their monthly telecom expenses? Only time will tell.

An Alternative Strategy: Getting Smart about SMS Usage and Costs

So if a high flat rate for SMS is a questionable strategy, what else can be done to meet the iMessage challenge?

I think the first step operators must take is a more comprehensive understanding of SMS usage patterns and cost awareness. Yes, iMessage and other messaging cousins will eventually do some serious damage to SMS revenue, but that’s not going to happen overnight. Carriers will be forced to enhance the user experience within SMS while at the same time monitor pricing to maximize profits.

One of the problems with SMS is that the margins have been so high that people never seriously scrutinized their engineering and wholesale costs. In addition the user experience is pretty non-existent. That philosophy has to change because the days of strong margin text messaging are going to be pressured more than ever with iMessage and other 3rd party TXT applications. It’s hard to compete with Free and Apple’s keen awareness on the user experience.

The right approach to the SMS problem is the same as it’s been for voice: examine usage patterns in great detail, reconcile bills, negotiate with wholesalers, and adjustment plans accordingly.

So in the spirit of better traffic analytics and cost management, here are few basic tactics – things that wireless carriers can do to keep SMS profits rolling in as long as possible:

• Let Usage Analysis Guide Pricing Decisions. While $20 a month sounds high, a thorough usage investigation can determine the right flat or tiered rate that will boost revenue without scaring users away to a competitor.
• Reconcile Bills – Carefully verifying wholesaler bills may be the single largest benefit: few carriers today know if their SMS bills are correct. But our experience at Connectiv is operators who put their usage data under an analytic microscope like our netCLARUS platform discover big cost savings.
• Negotiate with Inter-Carrier SMS Clearinghouses. Over the years, companies like aggregators have made a lot of money connecting SMS service from one carrier to another. But if you know where your customers are texting, you can identify opportunities for SMS peering and can thereby reduce the need for wholesaling.
• Conduct Fraud Analysis – Checking high volume users and high-risk country destinations can pay dividends by finding fraudulent users of SMS.
• Engineer SMS Infrastructure to Save CAPEX – Traffic analytics is a powerful architecture and planning tool. You can view peak hour stats, total MDAs, even MDAs per second by market. In short, you’ll have all the data you need to reduce unnecessary SMS CAPEX.

Connectiv Solutions offers solutions in SMS usage analysis. To learn more, download out SMS PDF, watch our SMS video or visit our website at www.connectiv-solutions.com.

Unlimited SMS: Is It Always Cheaper?

by Brian Silvestri

Unlimited is defined as not limited or restricted in terms of number, quantity, or extent.  This single word has become the definition of nearly every marketing offer from the telecom industry since the late 90s/early 2000s.  Carriers advertise unlimited mobile-to-mobile, unlimited domestic LD, unlimited roaming and unlimited nights and weekends.  Unlimited has some great advantages, but is it always cheaper?  Earlier this month a Tier I carrier recently changed their SMS tiered approach and decided to replace it with just one…unlimited. 

Does paying $20 dollars a month for unlimited SMS make sense versus a tiered approach where the cost can be $5/month for 250 messages or $10/month for 500 messages?  The additional annual cost to the subscriber is $180 dollars for those in the lowest tier and $120 dollars for those in the middle tier.  Is it worth the added expense?  Could it backfire and increase customer frustration resulting in higher churn?  To determine the answer one really needs to examine how many messages one sends and receives in a given month.  Sure the younger generation will generate more messages on average, but over 500/month?  What do the numbers tell us?  As an engineer, I love numbers and ratios, but sometimes you need to dig deeper to understand the real story.

Lets first look at industry published numbers that address SMS usage:

• According to a recent Neilson report 64% of all mobile subscribers use SMS which will only increase as the young generation penetrates the marketplace.
• Per the CTIA midyear report, in 2011 SMS messages will eclipse voice MOUs.  1.9 Trillion SMS messages were sent or received in the USA last year.
• Over a period of four years, we’ve experienced a 19% increase in MOUs/Sub.  During that same time period, we’ve experienced a 2,000% increase in SMSs/Sub.

At Connectiv, we wanted to understand lower level trends so we analyzed over 1.6 billion records from the Mid-Atlantic region to better understand SMS usage patterns.  Here’s what the numbers tell us:

It’s clear that 50% of the subscriber base does not generate more than 500 SMS messages in a given month.  More surprising is that 25% of the subscriber base practically doesn’t use the service at all (less than 10 messages per month).  And the top 1% averages 15,000 messages per month! 

From this dataset the majority of subscribers really don’t require unlimited.  Using a Tiered approach these subscribers could pocket over $100 dollars a year and stimulate the economy in other areas.  Now maybe that will change over time, but that is what the numbers tell us today. 

So before carriers jump on the Unlimited SMS bandwagon and disrupt an existing tiered approach, keep in mind 50% of your subscribers don’t need it today.  Being forced to accept an unlimited plan might just be enough firepower to frustration the subscriber which could result in increased churn.  Unlimited can be easier and may make sense, just understand the potential risks as well.

So where’s the growth coming from?  That will be addressed in my next SMS blog.

Avoid Potential Pitfalls in Offering Free International LD

by Hulya Altinsoy
Let's face it- The domestic voice market is saturated.  There's nothing left to give away on the domestic front, so Service Providers should look to the next logical frontier -Unlimited International Voice.

The challenge is that carriers can’t adopt the same methodology used for their domestic offerings and apply to the international front.  If they try, they will quickly find out it won't work and cost the company in lower profits (sometimes no profit) as well as increased churn.  There are complexities and issues that need to be considered and we've helped clients identify some of these issues.


Download "Talk is Cheap, Or is it?" for the Top 10 Pitfalls to avoid in offering Unlimited International Voice Plans. And see our Blog on BillingOSS World.

Least Cost Routing and Rate Audits Not Delivering the Savings You Expected? Here’s Maybe Why …

By Brian Silvestri

Least cost routing (LCR) is supposed to be one of telecom’s greatest cost-saving innovations. Yet our independent research suggests that many U.S. carriers with LCR programs in place are actually losing millions of dollars because the rates in their LCR databases do not reflect where traffic actually terminates.

Here’s the issue: Local number portability (LNP) has drastically changed the telecom landscape. Our analysis of 2 billion CDRs in the past 3 months shows that 35 percent of all domestic LD phone calls are replaced with a ported number or Local Routing Number (LRN). In fact, the impact of LNP is so huge that any LCR or cost management program that fails to take LNP into account is at best highly inaccurate — and at worst, a money loser because it’s sending traffic to high cost routes!

We get lots of questions and comments on this issue. Here are some of the most common ones and my answers …

I thought the LERG (Local Exchange Routing Guide) database was the gold standard for call routing.

I wouldn’t say the LERG is extinct, but it is certainly not complete. You can no longer look at the LERG tables and say, “My traffic terminated to such and such NPA-NXX, which belongs to company Z so a certain rate applies." The LERG must be combined with local number portability to truly make sense of who and what is happening in your network. The only way to be accurate anymore is to do an LNP dip for every individual call to get the true termination location.

You say 35 percent of LD Calls are ported to an LRN, but that number sounds way too high.

I agree: It does sounds high, but not when you consider the effect of number pooling.

Number pooling began when we started running out of phone numbers. When a carrier launched into a new market, the code administer used to issue it a block of 10,000 numbers, such as the prefix 703-433 in local Virginia.

But these days, the administrator is liable to come back and say, “I am going to take back some numbers from you and give it to another carrier to achieve code efficiency." The administrator then assigns LRNs to the codes being assigned to the new carrier. Pooling can also be used intra-company to support network and technical migrations.

Looking at the LERG, you may think a block of numbers is owned by a particular carrier and routing to a specific switch, but you’ll never know for sure unless you dip that called number to a full 10-digit level.

So why are carriers not applying post-LNP rates to their LCR and cost management audits?

Many are just not aware of the severity of the problem. But beyond that, a post-LNP look is hard to audit. Every month the number of records to check goes into the hundreds of millions or billions, and it requires that you independently dip every call against the Neustar LRN database, which is over 300 million records. Then you need to feed that data back into your LCR solution or Cost Management Solution and do it in near real-time.

Many of our clients don't have the tools or they lack the ability to do that analysis to answer the question: "Am I being billed correctly?"

Another issue is an ability to go back in time. In our netCLARUS system, we maintain LNP version control and in that way we can go back to a year ago and tell you the LRN a particular dialed number returned back then.

How does LNP affect the rating of Interconnect Bills and how widespread are LNP errors in the industry as a whole?

Our industry and client data suggests the problem is very widespread. In fact, LNP not only affects engineering and LCR, it also impacts telco billing and audits.

We analyzed a wireless client’s interconnect bills and found that an LRN was being applied in only 1 percent of their LD calls! So comparing their 1 percent with the industry average 35 percent, we knew they had a problem.

Sure enough, the LD provider was not dipping its calls properly on the bill and was misrepresenting where the traffic truly terminated. With our analysis, we calculated 7 percent more MOUs were actually ported and terminating to the cheapest rate category – wireless. The net result was a 5 percent monthly overbilling, which represented millions of dollars on an annual basis.

In this case, we ran the client through our Rate Audit process to ensure their negotiated rates were applied to the bills received by third-party vendors (e.g. LD providers). By performing a simple look-up against the rate tables, they could see how LNP affected their billing. We then gave them the data they needed to dispute their bills. And because the data was so well-documented, the LD carrier could not dispute the findings.

To reiterate, the inability to reconcile called numbers with LRNs is costing operators many millions of dollars in LD overbilling. And though most of our customers are wireless operators, the problem is not wireless-specific but applies to any operator who routes traffic and is billed based on terminating rate schedules.

So here are some action items that carriers who face LRN-related billing issues should consider:

1. Ensure your LCR solution aligns with how third-party vendors rate. Because LRNs represent 35 percent of LD calls, the old techniques are out the window. If the LCR solution is not taking into account LNP, but your vendor is, there is a good chance it is not routing to the lowest cost. To make the system work correctly, you need to build a common rating methodology across your third-party vendors and the LCR solution … which brings me to ...

2. Align your interconnect contracts for billing consistency. Having your eight different LD suppliers maintain eight different methodologies to rate a call is a walking disaster. We recommend you align all your LD partner contracts so they reflect the post-LRN method of rating calls. Where this consistency will really pay off is delivering a better LCR program.

3. Understand where your traffic is truly terminating and negotiate the best deals. An enormous amount of time and energy is spent in meetings to negotiate the best rates with LD partners. Yet ironically, if that energy were redirected toward analyzing the true flow and final destinations of your traffic, it sets the stage for a robust LCR program that will silently “bargain" on your behalf and reduce the need for lots of face-to-face negotiations.

4. Don’t try to fit a square peg into a round hole. Many operators are saddled with an underpowered tool for the problem at hand. You cannot expect a cost management solution that only rolls up summary level data to deliver what you need. A more intelligent tool is required that dips for every call and analyzes the gaps between your true termination cost and the actual billed amount.


<This blog was also published on Billing/OSS World website.>