The warped economics of the text message

The biggest trick the world's mobile networks ever pulled was to persuade us that paying around 10p to send a text message was a good deal. You can imagine boardrooms reverberating to the sound of laughter as gargantuan sums were scrawled on whiteboards – trillions of SMS messages, minimal costs, billions in revenue. What's surprising is that we've taken so long to twig that the feat of delivering 160 bytes of data really isn't really worth that much reward.

Many of us have been tweeting from mobile phones for years, barely denting our monthly data allowances, while similar messages sent via SMS have incurred wildly disproportionate charges. The old statistic – a 5p text message is more than 40 times more expensive than retrieving data from the Hubble Space Telescope – is still relevant today; for example, Vodafone's pay-as-you-go customers still fork out 12p for a standard-rate text.

Of course, unlimited texts are now a feature of most pay-monthly plans in the UK, but the SMS still represents a mighty cash cow for mobile networks; 9.6 trillion texts will have been sent in 2012, and annual revenue is predicted to grow to $150bn by 2013. But the number of texts we're sending is levelling off and dipping because of the growth of OTT – over-the-top – messaging that's routed via the internet. Apps such as Apple's iMessage, BlackBerry's BBM and the cross-platform WhatsApp make a mockery of the SMS; they duplicate the functionality, but the service is free.

The rise of OTT is costing the networks dear. A study by Ovum estimated that it represented $8.7bn in lost revenue in 2010, rising to $13.9bn in 2011 and continuing to rise this year. Telecom Italia chief executive Franco Bernabe said recently at the Mobile World Congress that lower SMS revenues would "significantly affect" the ability of the mobile networks to invest, no doubt prompting sarcastic boo-hoos from customers who are switching to OTT in droves. WhatsApp claims to process some two billion messages per day, and reportedly carries more messages on the BlackBerry platform than BlackBerry's own BBM application. iMessage, with its blue-tinted bubbles, is the darling of iPhone users. But the dark horse of OTT is Facebook Messenger.

It's not riding high in the app charts, but Facebook's billion-strong user base gives it huge potential power, with friends waiting to be contacted with a single tap. And Facebook is capitalising on this opportunity. Last week, Android users in India, Indonesia, Venezuela, Australia and South Africa were able to sign up to Facebook using only a phone number – purely to take advantage of cheap messaging and to avoid SMS charges. It's coming to other countries soon, and there are rumours that Facebook has its sights set on buying WhatsApp to consolidate its messaging position. The SMS won't suddenly disappear. As a function that's present on even the simplest handsets, all mobile users have access to it, while OTT exchanges rely on both parties owning the same app.

The SMS is still voted the top function of a handset that people can't live without, and it's one that the majority of people understand and use; 75 per cent of US mobile-phone owners send texts, while less than half use data. But with OTT apps now presenting such stiff competition, surely the days of the anomalously priced SMS are numbered.