Facebook's Purchase of WhatsApp Highlights Telecom's Big Texting Problem

US-IT-TAKEOVER-FACEBOOK-WHATAPP
AFP/Getty Images/Stan Honda
By Olga Kharif, Amy Thomson and Patricia Laya

Facebook's (FB) $19 billion purchase of mobile-messaging startup WhatsApp is a stark reminder of how much money phone carriers are losing out on as competitors let users text and chat at no charge.

Free social-messaging applications like WhatsApp cost phone providers around the world -- from Vodafone to America Movil (AMX) and Verizon (VZ) -- $32.5 billion in texting fees in 2013, according to research from Ovum Ltd. That figure is projected to reach $54 billion by 2016.

As more customers have switched to smartphones with better Internet access, people are relying more on applications such as WhatsApp to communicate. Instant-messaging services have taken off outside the U.S. where carriers don't throw unlimited texting into voice and data plans. The rise of these applications has offered a cheaper source of communication, especially for correspondence between different countries, undercutting texts that had once been a key source of income for carriers worldwide.

"The trend has been that messaging is eating away into that revenue, in some countries more than others, and that trend will continue," Chetan Sharma, an independent wireless analyst in Issaquah, Wash., said in an interview. "The impact of free messaging has been felt worldwide. WhatsApp has clearly been the cream of the crop."

Representatives for Britain's Vodafone (VOD), Mexico's America Movil and Sprint (S) didn't respond to requests for comment. A representative for AT&T (T) declined to comment.

WhatsApp Growth

Facebook, the world's largest social network, announced that it's buying WhatsApp in a deal that values each of its 450 million active monthly users at $42. Free for the first year and 99 cents annually thereafter, WhatsApp is almost always cheaper than texting, especially across national borders.

With a particularly strong following in Europe, India and Latin America, the service is rapidly displacing traditional text messaging as the preferred method for young people to stay in touch on mobile devices. Mark Zuckerberg, Facebook's 29-year-old chief executive officer, said he expects WhatsApp to reach more than 1 billion people worldwide in the next few years.

WhatsApp, Rebtel, Viber, KakaoTalk and other services use the Internet to send data instead of a cellular network, allowing users to send text, multimedia and voice messages for free, or close to it.

Texting Decline

As free services continue to gain in popularity, U.S. text-messaging revenue will decline 3 percent to 4 percent this year from $21 billion in 2013, Sharma estimated. Globally, carriers' texting revenues will peak by 2016 and then start to drop as well, he said.

The apps have eroded such revenue for several years and were a big reason why U.S. carriers began to include unlimited SMS in many of their service plans, Roger Entner, an analyst at Recon Analytics in Dedham, Mass., said in an interview. The first SMS, or short message service, text was sent over Vodafone's network in 1992.

"The wireless carriers were very concerned that WhatsApp and others would intermediate them," Entner said. "So the wireless carriers found the most consumer-friendly solution -- they gave it away, too. And that took away the incentive to join WhatsApp."

However, carriers in other parts of the world still charge high fees for texts, and their revenue will be affected as WhatsApp's popularity spreads, Entner said.

Mexico Popularity

In Mexico, for instance, almost 90 percent of all instant messaging goes through WhatsApp, according to Ernesto Piedras, director of the Competitive Intelligence Unit, a telecommunications consulting firm in Mexico City.

"From about a year and a half ago, WhatsApp use in Mexico has become overwhelming," he said in an interview. "It's convenient to use, and the more people have it, the more people use it."

Six to eight years ago, phone companies in Mexico generated about 15 percent of their revenue from text messaging, Piedras said. Now it's less than half of that.

WhatsApp also had an impact in Holland, where carrier Royal KPN didn't offer free texts as a part of its bundles, Mark Little, a London-based consumer analyst at Ovum, said in an interview. "KPN's SMS revenues plummeted because people used something better and free," he said. "Other regions haven't made the same mistake."

International Plans

Many carriers' international-texting revenue may be in limbo. Five percent to 10 percent of U.S. wireless subscribers send a significant number of texts to friends and relatives overseas, Charles Golvin, an independent wireless analyst, said in an interview. They often pay 20 cents to 25 cents for a plain text message, and as much as 50 cents per multimedia message.

"Facebook might encourage U.S. users to be more aware of WhatsApp as an alternative," Golvin said. "We might see the carriers start to reduce their fees for international messages, or bundle their international messages into a package."

Most U.S. carriers have moved to flat-rate, unlimited text messaging offers. AT&T, for example, has a $10 a month plan that includes international texts. Users on that plan are limited to 100 messages and charged 20 cents per message afterward.

When asked about the threat to text-messaging revenue from apps like WhatsApp, Debi Lewis, a spokeswoman for Verizon, said the company includes unlimited messaging as part of its shared data plans. Last week, Verizon added unlimited international text and multimedia messaging to the "More Everything" pricing plans.

Texting isn't dying anytime soon, Little said. "At the moment, the telcos have actually been responding to the use of free social messaging by including lots of free SMS" in bundles. "However, WhatsApp does offer a very sleek and simple, high-quality user experience that one might argue the old interface of SMS or texting doesn't."

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Iselin007

Dweeb-Buster must be texting his ancestors.

February 23 2014 at 11:44 AM Report abuse rate up rate down Reply
Iselin007

Millions of people are texting at work and behind the wheel endangering lives and property the real costs are uncountable. Now they can text and kill for free wow!

February 23 2014 at 9:44 AM Report abuse -1 rate up rate down Reply
Iselin007

First Lucent sold out to Alcatel costing thousands of American jobs with the like of TYCO, and others in the Mysterious tech bubble which was just a scam to outsource American manufacturing jobs! Gee notice since then millions are unemployed and suffering from job gaps and age discrimination.

February 23 2014 at 9:41 AM Report abuse -1 rate up rate down Reply
1 reply to Iselin007's comment
Iselin007

Who need's TYCO Security for crying out loud since they didn't prevent the theft of your jobs!

February 23 2014 at 11:49 AM Report abuse rate up rate down Reply
citadel4u

Texting is just the old pager system. It was only a $3000 software add-on to the Lucent Telecom Switches. It takes a lot more storage for a carrier to allow a voice mail than a simple text message. We tried to get the FCC to make the texting free, which it should be. But, since the carriers were already giving it away, the FCC saw no need to interfere. It was only after the carrier's saw so many people texting instead of using voice mail, or email, that they figured they could charge for the service. It's 1000% pure profit to them at almost no cost. Anyone with a minor bit of computer and telecom knowledge can create an Application Program (i.e. AP) that allows free texting. I find it hilarious that FACEBOOK would actually pay for WHATAP, a simple free program that uses the Telecom's own communication links to send text messages. It's nothing more than a very cheap Vonage. The only reason people use it is because it's free. The first time FACEBOOK tries to charge or interfere with it, the users will disappear. I might even write one myself. It's so easy, even a homeless person could write. OH< the guy who wrote WHATAP was a homeless person. HA HA HA FACEBOOK is going down the tubes and WHATAP is a sign of their desperation and stupidity. At least Zucker the founder isn't a fool. He's already cashed out of FACEBOOK. He saw the handwriting on the wall months ago.

February 21 2014 at 12:45 PM Report abuse +1 rate up rate down Reply
2 replies to citadel4u's comment
ak841

I guess your going to make a ton of money shorting Facebook. Oh you dont have the nerve ?

February 21 2014 at 7:43 PM Report abuse rate up rate down Reply
Iselin007

Whats app is what they will say to the officer when the texter is being hauled off to jail for causing massive loss of life or property damage. Don't forget you can't text your Lawyer from jail.

February 23 2014 at 9:46 AM Report abuse rate up rate down Reply