At the beginning of the ’00s, instant text communication was both exciting in its ubiquity and for its profitability. Web companies like AOL (NYSE:AOL) still were convincing people to spend money on instant messenger and email services while telecoms were making big money on mobile phone text messages that were only just coming into vogue. Today, text messages (or SMS services) represent $20 billion in annual revenue for the U.S. telecom industry.
But now, text, email and chat technology — thanks to the proliferation of web-connected handhelds — have merged into one single service that consumers aren’t interested in paying for. So if users continue to flock to an increasing number of free alternatives, what will Verizon (NYSE:VZ), AT&T (NYSE:T), and Sprint (NYSE:S) do when that money disappears?
Well, the loss of SMS revenue won’t exactly cripple AT&T or Verizon. Sure, Verizon pulls in $7 billion from text messages by itself — nearly half of the total take in the U.S. — but that represents just the smallest portion of the company’s $107 billion in total annual revenue. AT&T pulls in $125 billion in annual revenue.
Who cares, then, if free services on smartphones like Apple‘s (NASDAQ:AAPL) iMessage, Research In Motion‘s (NASDAQ:RIMM) BlackBerry Messenger, and the Microsoft-owned (NASDAQ:MSFT) Skype start offering free-to-use text, picture messaging and even video services?
No, the greater threat is that these services merging email, texts and instant messaging into seamless, free services might also start to incorporate voice, as well. Google (NASDAQ:GOOG) also is preparing a service for Android phones like those already mentioned, and that company has made no bones about its interest in taking on the VoIP industry, too.
What happens to Verizon and AT&T when their collective 215 million subscribers feel they shouldn’t have to pay as much as $90 for a voice-and-text plan when $100 for the best data plan alone can give them all the service they want? If users demand to not pay for voice packages, that could mean another potential $120 billion to $240 billion in revenues (based on varying voice packages) vanishing from the mobile market. That’s clearly a much larger hunk of the pie.
That lost revenue ultimately would have to be replaced by raised data plan pricing. AT&T and Verizon already have done away with unlimited data plan offerings in favor of tiered usage contracts that limit how much data mobile users can upload to or download from the Web. Sprint is the only major telecom left that offers unlimited data plans, and even that might not last. Presumably, if smartphone users try to use only iMessenger or a comparable service to communicate with people rather than texts, they’ll use up their data limits quicker and have to upgrade to a new package, thus benefiting Verizon, AT&T or whomever else.
The question is: Will people pay it? If AT&T and Verizon start charging $200 for packages that just provide data, forcing customers to rely purely on secondary services like Skype and iMessenger, it’s possible that smaller telecoms like MetroPCS (NYSE:PCS) and Leap Wireless (NASDAQ:LEAP) could get a second lease on life if they could provide low-cost, big-data packages for users. Now that popular handsets like the iPhone aren’t restricted to a single provider anymore, smaller telecoms potentially could find their business in data-only plans.
Verizon, AT&T and Sprint aren’t under pressure to meet these changes head-on in 2011. But in a few years, how these companies charge for their services is going to have to change dramatically.