SMS Teeters On Extinction In 4G Era
New data is showing an acceleration in the decline of text messaging (SMS) in the new age of over-the-top (OTT) services like WeChat, underscoring the urgency for China’s 3 telcos to find new replacements for this important revenue generator. The decline of SMS isn’t new, and has been discussed by all 3 of China’s state-run telcos at one time or another over the last 2 years. The issue was also at the center of a high-profile dispute between China Mobile (HKEx: 941) and Tencent (HKEx: 700) in late 2012, involving the rapid rise of WeChat. But the latest figures do point to an acceleration of the decline, which will lead to hundreds of millions of dollars in lost revenue for the big telcos.
According to newly released data, the volume of SMS messages in China fell 18.4 percent to 314.6 billion in the first 5 months of the year. (Chinese article) Obviously many of those messages were junk that generated little or no revenue for China Mobile and its 2 peers, China Unicom (HKEx: 762; NYSE: CHU) and China Telecom (HKEx: 728; NYSE: CHA).
But let’s try to quantify the losses for the telcos by assuming that perhaps half of those messages generated revenue at the rate of 0.10 yuan per SMS. That would translate to about 15.7 billion yuan ($2.6 billion) in SMS revenue for the first 5 months of the year, and 3.5 billion yuan in lost revenue. Based on their current market shares, that would mean up to $400 million in lost revenue for China Mobile in the first 5 months of the year, and perhaps half that amount for the other 2 carriers.
China Mobile’s annual report for last year showed how its own SMS revenue is rapidly declining. The nation’s leading carrier said its users sent 734.1 billion text messages over its network in 2013, down about 14 percent from the 744.5 billion the previous year. Revenue from SMS services fell at a slower 6.5 percent last year to 41.3 billion yuan, translating to about 3 billion yuan, or nearly $500 million, in lost revenue.
If the trend continues at its current rate, we could possibly see SMS messaging revenue fall 20-22 percent for the year, and the figure accelerate even more in 2015 as more people use Internet-based messaging services like WeChat. This kind of substitution isn’t surprising, and looks a lot like a similar phenomenon that happened about a decade ago. In that case, consumers began abandoning popular paging services en masse as modern mobile services become more widespread.
At the current rate, I would give traditional texting perhaps another 2 years of lifetime before it follows the same fate as paging services. In the meantime, all 3 telcos are scrambling to find their own path into a new world where OTT services like WeChat will become the main form of text communication.
Unicom was one of the first to take a major initiative in the area when it formed a tie-up with Tencent last year to promote the use of WeChat on its network. (previous post). China Telecom followed later in the year when it formed a similar tie-up for a newer OTT service developed by NetEase (Nasdaq: NTES), Tencent’s biggest online gaming rival. (previous post) China Mobile has also taken steps to overhaul its aging Fetion Internet-based messaging product, and I expect we’ll probably see a new launch for the service in the next few months.
But the 3 telcos are hardly the only ones chasing the messaging market. Japanese messaging giant Line is reportedly hiring a China team for a launch in the market later this year, and I expect we’ll see US leader WhatsApp make a play for China in the next 12 months. (previous post) With all that competition, the days when mobile operators could count on texting as an easy cash cow are clearly in the past, and all 3 of China’s telcos will almost certainly be looking at leaner contributions from such services for the indefinite future.
Bottom line: China’s 3 telcos will see their text messaging revenue evaporate over the next 2 years, forcing them to share revenues in partnerships with a new generation of OTT service providers.
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