The Commercial Sweetspot for A2P SMS

 In Operator News

Mobile operators, after seeing the value of A2P SMS as a source of revenue, need to understand the basic dynamics of price elasticity to pick the relevant rate for their termination service.

Let’s take a look at this picture:

First; “Market price” means that we talk about the rate that is paid by the A2P SMS market, and not the termination charged by the operators themselves. The difference is that if the operators do not have a filter, then traffic finds alternative paths to the Operators subscribers, bypassing the Operator’s termination rate. If the Operator doesn’t have a filter (or isn’t properly maintaining it), the market price is typically fractions of cents. At this cost, SPAM is profitable and can happen. Massive volumes of spam annoy the recipients, give the A2P service a bad name and gives no revenue to the Operators. A2P providers do earn a bit, but it’s a lot better for the industry as a whole if the SPAM market was killed. And the solution is a filter.

The filter needs not to look at content – the key point is that all messages which A2P content (typically alpha SenderId) should not come via the mutual forgiveness signalling relations between roaming partners. This is the key source of “grey route” traffic.

Ergo: An operator without a working filter is an operator who cannot monetize A2P SMS, and also expose it’s customers for massive volumes of SPAM.

Secondly, we can now assume the operator has a working filter. This is an unregulated rate so Operators should set it at a level at a commercial optimum, and my line of argument is that gross revenue does not necessarily increase by a higher price. It’s very easy to turn greedy, raise the price, thinking this would increase the revenue. As illustrated above, our thesis is that you should have a rate that scare off SPAM but raising it to a level where you also scare off the legit marketing traffic is a commercial “own goal”. Volumes of wanted marketing traffic goes down after the commercial optimum, as you only retain the transactional traffic. Raising the price further, you only retain the premium transactional traffic and for this segment, the volumes are very small. The thesis is also that the volumes are going down faster than the price goes up. Classical price elasticity at play.

So what is the commercial optimum? Well, that is the million dollar question, but I guess the only relevant answer is “It depends”. The country GDP is a key factor, but to generalise I would like to reference a report from Ovum.

Reuters, quoting Ovum says:
“The report, based on a global survey of enterprises and analysis of global SMS volumes, found a high level of price elasticity for A2P SMS. Specifically, half of respondents would send two to four times less traffic if the per-message price of an A2P SMS increased from the industry average of US$0.03 to US$0.05. Conversely, 33.9 percent of respondents said they would send between two and four times more traffic if the price was US$0.01”.

We see market rates of 5-8 cent, and then quite often in developing countries, where the recommended rate should be lower than in developed countries. The effects are two:

  • Legit traffic leaves SMS as a bearer, with the result that the Operators earn nothing
  • The inventive for creative providers to launch SIM farms is very strong. The quality degradation of a SIM farm SMS eventually is outweighed by the lower cost.

So the conclusions are:

  • Ensure you have – and maintain – a relevant SMS filter
  • Set a rate that is relevant for your market. We can assume that such a rate should be between 1-2 cent.