The SMS Ad market is touted to be approx $11 Billion globally by 2011 and there were approx 3.5 trillion messages sent by users across the world in 2008.  Obviously, these stats encourage many companies to extend services through SMS and cover that cost through Ads. Companies today offer services where you can send group messages, update your status, query for some information and so on. If you have been using SMS/texting  for twitter  or facebook, you should get what I am talking about. In most cases, these services are free to the end user, i.e. you just pay the standard text rate to your wireless carrier but not to the company whose service you are using (for example twitter/facebook). In the last few years, quite a few companies that launched  SMS text based services created a business model where they could cover their SMS cost by inserting 20 – 40 character Ads with the text message. However, it looks like my conviction that this was a flawed model is coming true.

Tagga & Tatango LogoJust recently two startups had to change their business models. While Tatango started charging users for their SMS based group communication service, Tagga made a drastic shift in their strategy by converting themselves into an Ad agency. My guess is that even the now popular Twitter at some point must have also thought about making money by inserting Ads into their SMS  messages. When we were working on Mobinett, we did a great deal of research on a viable business model for the company. And since SMS (text messaging) was one of key ways to interact with our platform, we had to figure out a way to make someone pay for those messages or get them for free unless you are sitting on a pile of VC money like facebook or twitter and can subsidize it. (FB and Twitter will never make money off SMS feature).

So why is the SMS Ad model not viable for startups and is there any money to be made from SMS  Ad marketing at all?

Before you read any further, if you are not familiar with mobile terminology, you can refer the glossary on mBlox’s site as you come across those terms in my post.

First, lets look at why this model is not viable especially for companies that do not offer dedicated marketing services.

  1. Revenues don’t support costs. The 20 – 40 character advertisements that these companies include as part of their SMS messages are sourced from other SMS Ad companies such as 4info (which is analogous to Google providing ads through adsense). So if the SMS Ads are priced at $40/CPM (cost per thousand impressions), which turns out to be 4 cents a message, 4info will probably keep around 60% of it and share the rest with companies like Tatango and Tagga. This turns out to be 1.6 cents of revenue. On the other hand if you have a dedicated shortcode, and are paying for the services of a mobile aggregator like mBlox, Verisign or Motricity you spend about $36,000 annually in maintenance and service charges. Additionally you also incur a charge of 3 cents for MT (mobile terminated) SMS (goes down to 1.5 cents for high volume) and 1 cent for MO (mobile originated) SMS. So even if we assumed that we were working on a very high volume, which is about 5 million messages or more annually, we still make approx 0.1 cents a message in profit (just from messaging).  But however, considering that there are other operational costs to cover, there is no way  SMS advertising can support a company. Building your own Ad platform to eliminate the third-party Ad companies in the chain may help a bit but that will require very high messaging volumes and may lead to loss of focus on your core service.Even Twitter (although many access it through desktop clients than SMS) has been unable to support SMS (text capability) completely in all countries except India, US and Canada. In India, it works out  for Twitter because the text messaging costs are way low and in the US, they have so much volume that they negotiated a flat rate instead of paying per message (costs don’t go up linearly with number of text messages). In most other countries Twitter supports only MO (mobile originated) messages i.e you sending them a message as opposed to them sending it since it costs less. So you don’t get notifications on mobile from Twitter.
  2. Restricting the already shortened message further. The SMS with its 140 or 160 character limitation (based on handsets/carriers) already puts restrictions on how much data users can send. Now if  we included an Ad into the message, we restrict the users further to about 110 characters. Its not something any user would prefer.
  3. Advertising is not context based. The advertising in these messages does not take advantage of the context to the fullest extent. Cell phones can offer more context than a laptop but this technology is not perfected yet especially because location information is hard to get from an SMS (unless you have hooks into carriers).
  4. Marketers prefer dedicated campaigns. Advertisers are not going to pay high CPMs for 20 characters. They would rather go in for a full-fledged campaign where they can use all the 160 characters and engage their customers more. On top of it not all the advertisers have joined the SMS bandwagon yet. Eventually as CPM prices go down, more will follow suit.
  5. Wireless Carriers will never reduce the SMS cost. They are in fact planning to raise prices. Verizon announced late last year that the SMS prices will go up but has not implemented it yet. So costs on this front are going up while revenues (CPMs) are coming down.

Bottom-line is although SMS is a good feature to have for your service, you will never make money on it by inserting Ads. Someone has to pay for it directly.

But what about the $11 Billion Ad market I mentioned above you ask and who is going to take a piece of that pie? I’ll talk about that in my next post.

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