SMS catch-22, and the path to virtualised messaging

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this piece Alex Duncan, CEO of Openmind, looks at the choices operators have in the face of declining messaging revenue.

By the end of this year, global mobile subscriptions are set to reach 7.6 billion, including 1.6 billion LTE subscriptions – more than the number of people on the planet.

Yet with this enormous growth in global subscriptions, mobile operators are facing an increasing number of challenges. Paramount amongst these challenges is the bundling of core voice and messaging services at lower costs, versus the significant upfront investment into 4G/LTE networks. As a consequence, total global mobile service revenue is slowing, and in some cases even declining. Ovum has forecast that it will increase at a CAGR of just 1.9%, from $999.9 billion in 2014 to $1.05 trillion in 2019. While Western Europe will be the only region to experience a decline during this period, from $148.9 billion in 2014 to $137.3 billion in 2019, a CAGR of -1.6% over the forecast period.

Under these demanding circumstances, operators must optimise the way in which they develop and deliver core services, and that includes ensuring that their infrastructure is not only fit for purpose but also cost-effective.

State of the messaging market

Over the past 20 years, person-to-person (P2P) SMS has been a highly profitable “cash cow” for mobile operators. Unfortunately, P2P SMS revenues are now in an increasingly volatile state, declining in many markets, due to bundled offers force by inter-operator price competition, and the explosive growth of over-the-top (OTT) chat apps. According to Ovum’s OTT Communications Tracker, across ten of the main chat apps, the estimated user base will reach 4.1 billion by 2017. During the same time period, monthly chat app messaging traffic is predicted to increase from 132.3 billion messages to 2.6 trillion messages.

Equally as significant as the challenges with messaging, is the risk that customers will migrate to OTTs for other, more innovative communications services. Chat apps now routinely include VoIP and multi-party conversations, and encourage users to stay within their platform by offering content and services. Recently, the main chat apps have all launched interfaces to bot platforms to support interactive sessions with on-line services. Operator communications services are becoming the fallback for chat app users, rather than their first point of call.

There is a sense that P2P battle has been all but lost to OTT services. Yet, messaging remains a sizeable chunk of operator revenue, will continue to be so, and there is indeed scope to develop it further. For example, the need for application-to-person (A2P) communications is rising within the enterprise market. The catch 22 of the situation is that much of the infrastructure that runs these core services are in need of significant investment, if operators are ever going to compete with agile OTTs.

Operator Messaging: an ideal candidate for NFV?

P2P has always been the larger of the messaging services, and so as revenues dwindle, operators are reluctant to gamble on swallowing the costs of upgrading their messaging infrastructure now and reaping the benefits later. Particularly as they work to claw back recent investment into 4G/LTE networks, in the face of data commoditisation.

Yet the fact remains, much of the existing messaging infrastructure is monolithic, rigid and often vendor-locked. The result is costly, inefficient and prevents operators from easily developing and scaling new and compelling services – from which they could drive new revenue opportunities. With this in mind, the justification for investment comes in two forms: cost saving and innovation – both of which virtualisation and network functions virtualisation (NFV) are precisely positioned to enable.

To reduce the hefty operational costs associated with legacy messaging infrastructure, operators need to upgrade to a more cost-efficient, virtualised platform. According to Ovum, industry estimates put the cost-savings to operator from deploying virtualised platforms as upwards of 70% on hardware alone. NFV technologies also provide operators with the agility and flexibility to scale. Being able to scale capacity is extremely important for the delivery of messaging services, as it provides flexibility to deal with peaks and troughs in usage. Under the traditional model some capacity often went under-utilised, but with NFV capacity can be added, removed or reallocated dependent on traffic and service demand. This also helps to reduce previously wasted operational costs.

The current model also prevents operators from rolling out new services quickly and cost-effectively. Adopting a virtualised messaging infrastructure allows operators to enhance existing services and roll out new services, all while reducing risk. For example, when rolled out in virtualised modules, RCS allows operators to rapidly launch and scale (add or remove) IP-based communications services, like VoLTE, group chat and video call, based on customer demand.

With P2P SMS revenue is in decline, operators are in need of something new. Through deploying virtualised technologies, operators can modernise core network services such as messaging and begin to deliver new revenues. The catch 22? The investment needed is significant, and operators are finding it tricky to justify spend on a service in decline, regardless of the benefits vitalisation can deliver. The justification for the investment lies is in cost-saving. Legacy infrastructure is bogged down with hefty, unnecessary operational costs on hardware and unused capacity. Instead, virtualisation provides operators with a cost-effective way to innovate and then scale to reflect demand.

It all boils down to this – operators have two choices: continue to make do with current infrastructure and grasp at declining revenue for as long as possible. Or alternatively, take the path to virtualisation and protect the margin for profit for much longer into the future.

As CEO Alex has led Openmind through significant changes, from a zero revenue base to a multi-million dollar global enterprise with telecommunication customers in all parts of the world. Alex is responsible for leading the Openmind team to greater growth, through the development and implementation of the company strategy. Alex holds two Trinity College, Dublin, Degrees; a Master’s Degree in International Business together with Bachelor’s Degree in Electronic Engineering.