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Exclusive: Verizon Wireless transaction fee could affect SMS text messaging

Verizon Wireless' decision to levy a 3-cent transaction fee for every outbound SMS message sent to its subscriber base could potentially threaten the viability of legitimate text messaging.

That charge from the nation's No. 2 wireless carrier will either double or triple the cost to marketers who send out SMS text messages to opted-in consumers who are subscribers of Verizon Wireless' mobile phone services. The fee is effective Nov. 1.

"SMS drives everything in the mobile channel," said Tim Miller, president of Sumotext Inc., a Little Rock, AR-based mobile marketing services firm. "It's the only protocol that's safe, the only protocol that consumers can trust."

Just business
Marketers typically pay a 2.5-cents transaction fee per SMS message sent to opted-in consumers on a U.S. carrier's subscriber base. But that amount decreases to a penny with the growth in the volume of SMS messages delivered to the network from that content provider or marketer.

"If you take the average high-volume content provider paying an aggregator 2.5 cents per message, this more than doubles their costs overnight," Mr. Miller said.

"If you take the largest application providers paying aggregators 1 cent per message because they have committed to buying millions of messages per month, their cost structures just tripled," he said.

"Imagine if your business was spending $20,000 per month with its sole supplier. Then, the supplier announced that your invoice next month was going to be $60,000."

The rate increase will affect heavy users of legitimate outbound SMS messaging in the entertainment, retail, sports, news, weather, travel, food and political sectors. But it will also affect the mobile service providers they use to send out messages, such as SMS aggregators, providers and agencies.

For Verizon Wireless, the decision was purely business.

"We recently notified text messaging aggregators that there will be an increase in the fees they pay for the services they receive from Verizon Wireless," said Brenda B. Raney, executive director of corporate communications at Verizon Wireless, Basking Ridge, NJ.

"Just like any business, we reassess our charges to make sure they align with our costs for providing the service and sometimes it becomes necessary to make adjustments," she said.

"In this instance, this is the first increase the company has implemented since the service began in 2003."

Other carriers such as AT&T, T-Mobile, Sprint and Alltel have not yet imposed a similar increase in text transaction fees.

Steve Livingston, chief marketing officer of SMS aggregator mBlox, is perturbed by Verizon Wireless' move.

"This recent announcement from Verizon is very significant because a large number of market segments will no longer be able to participate in off-portal SMS services," Mr. Livingston said.

"Although we understand the carrier's need to monetize, the immediacy, the market timing and level of cost will create a shock to the system," he said.

"The mobile channel will quickly become unattractive to many companies, small and large, that have been investing in new innovative programs and services."

Leading text aggregator OpenMarket, an Amdocs unit, has already decided to pass on this Verizon-imposed cost to its content-provider customers in an email sent late afternoon on Oct. 8.

Dear John â?¦
In its email to customers, OpenMarket said, "Effective November 1, 2008, Verizon will assess a transaction fee of $0.03 for every MT message processed on its network. Please note that these message fees will apply to standard rate and premium programs. Transaction fees will not apply to Free-2-End-User, Mobile Giving, or Non-Profit organizational programs.

"Pursuant to your Commercial Services Agreement with OpenMarket (including former Simplewire Agreements) concerning Third-Party/Operator Fees, in the event message fees are assessed by Verizon for any of your programs, these fees will be passed on to your company at cost.

"Please forward any questions or feedback to your Account Manager.

"Sincerely,

"OpenMarket"

A few hours after publication of this article at 4 p.m. Eastern Time on Oct. 9, OpenMarket sent another email to its customers headlined, "Important Notice: Verizon Wireless Transaction Fee Update."

The email stated:

"Dear OpenMarket Customer:

"We wanted to keep you informed with regard to our previous communication on October 8, 2008 regarding new messaging fees from Verizon Wireless. We sincerely appreciate your questions and concerns surrounding this very serious industry-wide issue.

"OpenMarket is working vigorously with its customers, Verizon and other industry leaders to strongly voice our concerns about the impact this abrupt pricing change from Verizon will have on the entire messaging industry. Additionally, we are working to obtain more information on specific policy details and timelines.

"We appreciate your partnership as we work through this critical issue. We will continue to keep you informed of updates as they occur.

"Please contact your Account Representative with any questions.

"Sincerely,

"OpenMarket"

An aggregator such as OpenMarket typically is the technology and infrastructure intermediary between the carrier and content provider, including agencies and publishers.

The fact that OpenMarket undertook to pass on the cost without consulting fellow SMS aggregators has upset some in the industry.

"What should have happened is that before an aggregator went on the record with the rate increase, there should have been a joint communication strategy to ensure the correct message is being conveyed," said a top executive at a leading SMS aggregator who preferred anonymity given the sensitivity of the issue.

The leading SMS aggregators nationwide include VeriSign, MX Telecom, OpenMarket, mBlox, Motricity, Sybase and SinglePoint. Executives at most of these firms are busy fielding calls from worried customers whose text message programs are in jeopardy.

The executive from the leading SMS aggregator was quite certain that marketers and content providers would not factor these costs into their text messaging efforts.

"They're not going to spend that kind of money on mobile," the executive said. "It's tough enough to have their mobile programs running."

Verizon's timing for the SMS rate increase could not come at a worse moment. The economy is tipping into what is likely to become the Great Recession, forcing consumers to cut back on discretionary spending.

Online and mobile marketing efforts typically encourage consumer spending with offers, discounts and special deals. This outreach also is designed to strengthen loyalty ties which weaken in economic slowdowns as consumers shop more by price than brand.

"Maybe the explosion in SMS volumes is really taking a big toll on Verizon's costs, and they can justify the new fee to cover expenses," said Neil Strother, Kirkland, WA-based analyst at JupiterResearch.

"On the other hand, it's a big hit all at once, especially given the macro-economic context," he said. "It seems like a stair-stepped approach would have been in order, maybe a half-cent now, with incremental increases as needed over the next year or two."

A win for SMTP?
Another issue that worries mobile service providers is that most marketers parallel mobile to email, which costs next to nothing to deploy messages.

The mobile ecosystem is different from email, peopled by a plethora of small businesses devising programs and technology to help create and send messages through text aggregators and carriers to the ultimate recipient, the end consumer.

Now, with the steep rate increase from Verizon Wireless, every SMS sent to the consumer comes with a higher cost, thus wrecking the mobile return on investment expectations.

"This is a significant development, just as short code marketing is really hitting its stride," said Nic Covey, Chicago-based director insights at Nielsen Mobile.

"Additional charges around text messages put additional pressure on media companies to drive high CPMs in their short code efforts," he said. "This also ups the ante on a marketer looking to demonstrate ROI in their short code efforts."

Indeed, the rate increase could become a coup de grace.

"Most people will stop the programs," the SMS aggregator executive said.

"A lot of them are either a) going to shut down because of increasing costs which they'll not be able to pass on to their brand and b) from a technological standpoint, they're going to push their customers to use the email gateway to push messages to their customers," he said.

"At that point, you can't regulate the opt-out or spamming issues."

That is the worry of purveyors of standard-rate text messages. Premium rate is another story.

Most senders of premium-rate SMS typically pay $9.99 for 30 alerts a month to an opted-in mobile subscriber. The Verizon rate increase would add another 90 cents to that cost, at an extra 3 cents per text alert.

"So now you're going to dip into the quality of content you're going to send to the consumer," the SMS aggregator executive said.

Sumotext's Mr. Miller just cannot fathom the logic of Verizon Wireless' move.

"The most amazing aspect of this [Verizon Wireless rate increase] is that it's targeted at the legitimate short code programs responsible for the growth of the mobile channel," Mr. Miller said.

"Legitimate content and application providers were already spending thousands of dollars a month to properly access these carrier networks," he said. "Meanwhile, you still have thousands of illegitimate programs out there sending free text messages through the carrier's exposed SMTP gateways."

Text context
New data from CTIA: The Wireless Association show that the current total mobile subscriber base nationwide has grown to 260.8 million.

Of that number, AT&T Mobility leads with 71.4 million subscriptions, followed by Verizon Wireless' 67.2 million and Sprint Nextel's 52.8 million. T-Mobile USA was next with 30.8 million subscribers and Alltel with 13.2 million. Verizon Wireless plans to buy Alltel.

Text messaging has become a habit with these subscribers. In fact, research released last month by Nielsen Mobile showed that the typical U.S. mobile subscriber now sends and receives more SMS text messages than he or she makes mobile phone calls.

Nielsen Mobile data for April through June showed than the average mobile subscriber sent or received an average of 357 text messages a month versus 204 mobile phone calls.

Another recent study from ABI Research claims that text messaging will retain its lead as the highest revenue generator across all messaging categories.

SMS is expected to generate $177 billion in global services revenues in 2013, according to ABI. The market researcher said SMS will account for 83 percent of all mobile messaging revenues through 2013.

"As text messaging expands and consumers become more accustomed to short code marketing, though, I know that the media companies and marketers will find a way to make the new fee structure work," Nielsen Mobile's Mr. Covey said.

"This presents the biggest challenge for nonprofits and political campaigns, who may grow less inclined to see SMS as a realistic marketing channel," he said.

"Thankfully, while this indeed raises the overall CPM for a text-message campaign, it still leaves SMS in the ballpark of many traditional media. Fighting not just on cost but also on the personal, portable and targetable nature of the medium, mobile still looks pretty good in the broad media landscape."

That optimism may be hard to swallow for some, especially when marketing budgets are threatened by a slowing economy.

A steep rate increase, particularly at this time, from Verizon Wireless for commercial text messages to opted-in consumers who prefer text communications does not make sense to Sumotext's Mr. Miller.

Small mobile service providers and brand or direct marketers may balk at absorbing the costs, he said.

Besides, Verizon Wireless already charges its subscribers as much as 20 cents just to send or receive a text message if they do not have a text message plan.

"You would think the industry would finish cleaning up the channel before attempting to squash the business models responsible for all of this growth," Mr. Miller said.

Efforts may soon be underway to chart a coordinated plan of action against the Verizon Wireless rate increase.

"I think the content providers and the industry, as a whole, need to communicate the challenges and impact this rate increase will have on the entire marketplace," the executive at the SMS aggregator said. "Aggregators essentially pass on the costs.

"The content providers need to make the noise," he said. "They'll have to rally against this. They'll have to provoke change."