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Strategy and analysis about mobile, smartphones, tablets and connected experiences

Apple’s iMessage Cannibalizes SMS But is No Threat to Operators

with 17 comments

A major part of Apple’s new iOS software update is iMessage, which replaces the iPhone’s standard SMS app. The iOS5 software is compatible with approximately 200m of the 250m total iOS devices sold, including both the older iPhone 3GS and iPhone 4 models, as well as the iPod Touch and iPad. It’s also installed on all new devices including the iPhone 4S. As of today, over 25 million devices now have iMessage installed and Apple sold 4m iPhone 4S handsets on its first weekend on sale.

The way iMessage works is extremely interesting. In so doing, iMessage cannibalizes carriers’ SMS and MMS services:

  • Any messages sent from an iPhone to another iPhone with iMessage installed are automatically sent by iMessage over the Internet rather than via SMS. This bypasses carrier text messaging (SMS) charges but requires a working data tariff.
  • Similarly, any photos or videos sent over iMessage bypass costly operator MMS systems. There’s even an iMessage preference option for users to switch off MMS so they do not inadvertently incur MMS charges when they’re intending to send for free via iMessage.
  • Messages can be sent to or from iOS devices that lack SMS capability, such as the iPad and iPod Touch.
  • Users can address messages to an email address rather than a phone number. This is essential to send messages to an iPad or iPod Touch. New iMessages sent to a phone number only appear on an iPhone. Any messages addressed to an email address are sync’ed to all iOS devices tied to that Apple ID.
  • Users can change their iMessage “Caller ID” to be their email address so that any replies go to all of their devices. This is very similar to the way Apple’s video chat service, FaceTime, setup works. Additionally, users can attach multiple email addresses so that iMessage will receive messages sent to any of a selection of email addresses.
  • By default, iMessage does not report whether a message has been read but there’s an option to set this to “on”. There’s also an optional ‘Subject’ field that starts out “off”.

iMessage is clearly Apple’s take on BlackBerry Messenger (BBM), small messaging players such as Whatsapp or eBuddy, and Internet instant messaging systems such as Microsoft Live Messenger or AIM. But iMessage does not the deliver the precise same mix of product benefits as any of those alternatives.

Apple has a number of differentiated twists on their execution that guarantee iMessage will be a success:

  • iMessage setup is automatic. The user does not have to do anything for iMessage to work. I can’t overstate how important this will be to driving uptake. An iPhone will automatically detect if a recipient is also using an iPhone with iMessage. To signify that iMessage is in use sent messages appear with a blue paper background, rather than green for SMS, and in the text field where users write new messages the word “iMessage” appears faintly. This ensures that all iOS5 users will end up using iMessage without having to install any extra app or alter any setting.
  • It’s completely integrated with SMS and the rest of Apple’s OS. On the iPhone, only Apple has this capability to effectively replace a standard app. With Android, other messaging app creators could mimic iMessage. They should.
  • iMessage’s support for the iPod Touch will extend its appeal to young consumers unable to afford an iPhone. The installed base for the iPod Touch is over 60m (we’ll know how much more when Apple announces its Q3 2011 results). This will act as an acquisition driver to encourage iPod Touch users to switch to the iPhone.
  • Message sync between devices enhances the value of owning an iPad. When Apple announced the iPad it pitched it as the third device. But without great sync there’s always a danger that the iPad is the Gooseberry to the iPhone and notebook PC. iCloud and iMessage’s sync removes this convenience barrier to increased iPad use.

So, why is iMessage not a threat to telecom carriers now?

Because Apple is playing a bigger game than competing in telecoms. Plus, operators are already moving on from SMS. They’ve known this day would come for years. Specifically, iMessage isn’t a major issue to carriers because:

  • The quantity of SMS messages bundled with iPhone contracts is so great that there’s virtually no revenue cannibalization risk. In the UK, Vodafone and O2 offer unlimited texts with all bar the cheapest of their iPhone contract tariffs. With such large bundles, carriers have nothing to lose if some users send some texts via iMessage across the Internet rather than through SMS. Operators also continue to have the option of tweaking the amount of subsidy they offer new iPhone owners if they are concerned about ongoing revenues.
  • iMessage iPhone users still need an SMS tariff. Text messages are used behind the scenes by Apple to set-up iMessage connections, so users have to have SMS capability to use iMessage.
  • Apple is focusing beyond the phone and beyond the mobile industry. iMessage’s support for non-phone devices such as the WiFi-only iPod Touch and iPad shows that Apple is competing with Internet players and not carriers.
  • iPhones will comprise a minority of any carrier’s user base. Even with the massive success that Apple enjoys, most phone users will not use iPhones. So, the universal support that SMS enjoys — a benefit of being able to text anyone anywhere — will continue to be essential for all phone owners, even those with iPhones.
  • Apple still needs the carriers. Almost all iPhones are sold with operator subsidy in countries where phones are sold that way, for example the US, France and the UK. As the iPhone is such a very expensive phone this won’t change any time soon. Carriers still have the ability to influence Apple, for example to ensure that iMessages addressed to a phone number are always delivered to a phone and to ensure that fall back to SMS continues to exist.
  • iMessage could help grow photo messaging. Operators could lobby Apple to remove the option for users to switch off MMS fall back, in which case iMessage could actually help drive stalled MMS revenue growth by making photo messaging easier. A precedent to this is the way iPhone’s handle WiFi tethering or APN settings: What options a user has visible in the iPhone interface depends on which carrier’s SIM is inserted into the iPhone (interestingly, this remains the behaviour even with legitimately SIM-unlocked iPhones).

So, iMessage places Apple in the unusual position of replacing a cash cow mobile operator service, SMS, with their latest app but does not make Apple any more of a threat to carriers than they already are.

Instead of operators, the companies that should worry about competition from iMessage are those that have been trying to replace SMS with instant messaging for many many years: Notably RIM, because of the importance to them of BBM, and their vulnerability due to the large service outage they had last week; and the numerous messaging-centric start-ups such as: Whatsapp; eBuddy; Nimbuzz; Fring; Palringo; BeeJive IM; Xava’s Yak Messenger; Shape’s IM+ and many many more.

17 Responses

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  1. Hmm… you can’t really use “cannibalises SMS” and “no threat to operators” in the same blog post :).

    Couple of things: iMessage could cause termination rate imbalances between operators. SMS termination rates usually cancel each other out, as texting is a conversation (you send a text, and receive a response). Now, you might start off with an SMS, and continue on iMessage.

    Second, the impact of iMessage on operators will vary greatly from country to country. In some areas, SMS retail and termination rates are artificially high. In those places, iMessage could become an attractive option, and rock the operator boat(s) considerably. Then there’s prepaid vs postpaid thing to consider as well. If iMessage allows people to prepay with lower SMS bundles… why wouldn’t they?

    Finally, I’m half wondering if Apple isn’t using iMessage as the test bed for… iVoice or iCalls. Either way, I’d feel nervous about iMessage if I was a carrier.

    • Agree completely about iVoice, except that I reckon Apple is already moving in that direction but it’s called Facetime, not iVoice. While everyone thinks Facetime is just about video chat, the system could equally work for voice alone, Apple has done almost all of the work. Real time video communication is harder than voice. And, Facetime can do some very nifty side-stepping of the circuit switched network. So far, it’s WiFi-only but that’s a business decision that could change.

      On SMS termination imbalances – I don’t see this being much of an issue. I’m not clear on why there would be an imbalance: Even if only a single SMS is used to set-up an iMessage conversation, which is an assumption, surely there wouldn’t be enough iPhone users to create a significant asymmetry? And, there’s a good chance that either SMS is only used once to tell iMessage that a given recipient is on iMessage, or there may be a two way exchange of SMS to set-up the communication. We just don’t know yet until someone tests precisely how Apple has implemented it.

      iMessage’s impact on operators will vary from country to country, it’s *very* hard to generalize, but the trend I see pretty much everywhere is away from per minute and per message charges towards bundles. Many of these are combined into a contract. For pre-pay, this is also happening: often bundles of messages are offered as add-ons and sold in a carnet-style pack. Again, this is a part of a shift from event towards flat rate.

      re “you can’t really use “cannibalises SMS” and “no threat to operators” in the same blog post :)” Well something can cannibalise usage but not revenues and that’s the argument I was setting out.

      Plus, given the issues operators have had with MMS photo messaging revenue growth, I do see upside for operators in using iMessage to boost picture messaging activity that would outweigh any cannibalistic impact, provided operators successfully lobby Apple to remove the option to run off MMS fall back. If that happens, then even if iMessage photo messaging usage is high operators will still benefit greatly from iMessage users sending photos to other phone owners where MMS charges occur.

      Ian Fogg

      October 17, 2011 at 10:35 pm

  2. Very helpful summary. I was trying to fathom how iMessage was supposed to work. It doesn’t apper to allow a .me e-mail to be a recipient, however, as it is ‘already in use’, but readily accepts gmail. Still trying to work round this but your article gives me greater confidence in the ‘bigger picture’ of the solution

    Richard S

    October 17, 2011 at 10:33 pm

    • I had the same ‘already in use’ error with one email address of mine when I tried to attach it as a recipient email address in iMessage settings. Then I realized that I had that email address tied to a different Apple ID (my US store account). Could that explain your issue with your .ME address? Regardless, good luck!

      Ian Fogg

      October 17, 2011 at 10:45 pm

  3. “iMessage iPhone users still need an SMS tariff. Text messages are used behind the scenes by Apple to set-up iMessage connections, so users have to have SMS capability to use iMessage.”

    I was curious why you say this? IMO they should only need a phone number to discover whether another phone has registered with their iMessage server and is iMessage capable?

    Glen T

    October 18, 2011 at 12:54 am

    • It’s actually from Apple’s own description of iMessage. When a user switches iMessage to “on” in the iPhone’s settings app, the phone shows an alert: “Your carrier may charge for SMS messages used to activate iMessage.”

      Ian Fogg

      October 18, 2011 at 9:06 am

      • This is not true. No such SMS capability is required. iMessage is all XMPP, that is why iPods can send iMessages. Simple test… Pull out your SIM on your iPhone, keep WiFi on, and ask someone to send you an iMessage, you will still get it. Askance non iPhone user to send you a text and you have no way of retrieving that.

        Chad

        January 25, 2012 at 4:09 am

  4. How does iMessage work? Do we have to send all our data all the way to Apple servers and then back to handset? I noticed the communication is fast anyways.

    Yaz

    October 18, 2011 at 3:06 pm

  5. I disagree that iMessage won’t impact _any_ carriers SMS plans – in the US in particular it’s my experience that SMS plans were until recently very much a rip-off in their pricing, and that you could opt to have very few texts per month. Some carriers that would be impacted like this have now changed or are planning to change their SMS terms, forcing a minimum of hundreds of SMS on users if they want to have any SMS ability at all, thereby preventing users from saving money by buying less SMS packs per month.

    So iMessage did pose a threat – but the networks have got round that by screwing the customer. Good old networks! :)

    In the UK we get ridiculous numbers of SMS per month, if not unlimited these days, because we’ve been using SMS heavily for over a decade whereas I gather it’s been a relatively recent phenomena State-side (relative to ‘over a decade’ anyway!).

    my glass eye (@myglasseye)

    October 18, 2011 at 3:36 pm

    • I said iMessage wasn’t a problem for operators, not that they wouldn’t change tariffs (which they are doing all of the time). If, as you say, they have evolved their tariffs then essentially they’ve come through without problems.

      Ian Fogg

      October 18, 2011 at 3:48 pm

  6. Won’t Apple be at an unfair advantage by giving iMessenge away as part of iOS5, especially since it requires no additional downloads or registration? A bit like Microsoft giving Internet Explorer away along with Windows?

    barton71

    October 18, 2011 at 5:26 pm

    • There are two big differences:
      1) Apple doesn’t dominate the mobile phone market the way Microsoft controlled the computer in the late 1990s when Windows market share was around 95%.
      2) Mobile devices have always included a rich set of apps to work, unlike the PC where historically most apps are installed later. With the arrival of mobile app stores this difference has narrowed, but the history of how each market reached the current state is still relevant.

      So, for now, given no mobile OS has a dominant market share I don’t think this is an issue. But should one player — Android, Apple, Microsoft, even RIM — become dominant then I do think we’ll revisit all of the old arguments about what is right or wrong to include in an OS. Ironically, while Microsoft struggled with anti-trust issues on the PC due to Windows market dominance, Apple kept adding more and more apps into OS X so that OS X now has a much richer set of apps included than Windows 7.

      Ian Fogg

      October 18, 2011 at 6:57 pm

  7. I think the (current) achilles heel of iMessage is that it uses Apple IDs to communicate between devices. At least, that is what seems to be the unique identifier in my experience. I had to share my Apple ID with another iPhone user (wasn’t concerned, he already knew that email address) before we could iMessage each other. Once set-up it worked like a dream, what was more impressive was how a single conversation flipped to/from SMS and iMessage as I was going through variable coverage (on the Circle line!).

    I am sure Apple know the MSISDNs of all their iPhones and also know which of these have iOS5. Therefore they could easily replace SMS with iMessage but my iPhone doesn’t do that. It seems to me they are taking a softly-softly approach at the moment and could be a LOT more aggressive with the operators if they wanted to.

    Great article though Ian and thanks to @charlesarthur for bringing me here.

  8. Actually, consider international sms, which I think quite a few of us use whatsapp for. The carrier here in US forces you to sms over imessage if you are not on wifi (defeats point of free text messages if they force me to sms doesn’t it? When home on wifi I don’t need to sms, obviously, as I have skype and IM+ and googlechat. And a keyboard.) further, if the person with whom I’m texting is out and about, then they are stuck on sms too. I have an unlimited data plan, so making me use $1.00 texts is rubbish when I pay for unlimited data, and imessage goes over *data*. So in reality, I pay already to use imessage. But since we naturally text when out of the house, and we must use sms to do so, then there is absolutely no avoidance of the sms package is there? And Int’l tarrifs are additional rip offs, so basically they are making us pay twice for a specific functionality now (re other iphone users only) — unless I can figure out how to force the use of imessage over sms, even if both parties or one are off wifi. (any ideas?).

    This is how the carriers are still making money, and eliminating the cost benefits of imessage. though I eagerly awaited imessage, I now find it useless, and am still using whatsapp and heytell. Funny how that is, because icloud as backup required me to pay, so that went out the window as well and I am still tethered. My laptop is storage I’ve already paid for, and since it’s a mac, highly.

    Lesley

    October 26, 2011 at 5:56 pm

    • you have unwittingly made an excellent argument to ditch sms in favor of XMPP ;)

      Komrade Jane

      August 26, 2012 at 5:10 am

  9. XMPP is absolutely a threat to [sms] carriers. XMPP is superior to sms in ever rational way.

    Komrade Jane

    August 26, 2012 at 5:03 am


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