Will Verizon's New Three-Cent Hike Kill SMS Services?

On Friday, word got out that come November 1 Verizon Wireless plans to tack on an extra 3-cent charge for every SMS message sent by Web information services to any of its mobile subscribers. That hike will be on top of the 20 cents per message that Verizon subscribers already pay (even those with “unlimited” plans). Thus, in one fell swoop, Verizon is attempting to boost its SMS revenues by about 15 percent.

While it may be good for Verizon, the additional charge is not good for any service that sends out millions of SMS messages each month. The move caught a lot of Internet companies, SMS aggregators, and media companies by surprise. For instance, I asked Twitter co-founder Biz Stone what impact it would have on the micro-blogging service, which lets users keep up with every Tweet they follow via SMS, and he didn’t know:

We’re still investigating with Verizon so I don’t have a definite answer for you right now.

In August, Twitter suspended the SMS feature in the UK and other foreign countries because it would have cost the company as much as $1,000/year/user. In the U.S., apparently it has more of a flat-rate pricing.

But that might change now with Verizon—and other U.S. mobile carriers as well, if Verizon’s competitors match the price hike. How long are they going to stand by and watch Verizon capture a 15 percent margin advantage in the booming SMS business? If the new 3-cent charge becomes the norm, it would cost companies $30,000 for every million SMS messages they send out.

I use Twitter here as an example, but it is by no means alone. Thousands of Web services use SMS as a communication channel. For example, Google lets you search by SMS and also lets people set up automatic SMS alerts from Google calender and other services. Nearly every sports, stock, and weather Website (not to mention the political campaigns) lets you get SMS alerts as well. Those are the heavy volume users. But this new charge could end up hurting SMS startups such as 3Jam, 4Info, or TextMarks the most.

Now, of course, the price hike could backfire on Verizon. Google, ESPN, Twitter, and others could just suspend their SMS features for Verizon customers, and its competitors could use that disparity to their marketing advantage. But if AT&T, Sprint, and T-Mobile decide that they too can squeeze out an extra three cents per SMS message, they might simply pile on board.

Forget for a moment that the mobile carriers are already making a huge profit margin on the 20 cents they charge users for each message. They know they cannot charge consumers any more, but Verizon at least thinks it can turn around and charge the Web services where the SMS information is originating. If the charge spreads to other carriers, those services might die or stop using SMS as a communications channel.

(For Twitter, at least, this may not be so dire. Although Stone would not confirm, my understanding form another source is that SMS accounts for less than 10 percent of Twitter’s overall message volume. That makes sense to me. I only use Twitter’s SMS functionality to send in Tweets from my phone, not to receive the barrage of Tweets that I follow).

The other way this could backfire for Verizon is that it could raise some serious Net neutrality issues. If it does not apply this charge evenly across the board, or starts carving out exceptions to do biz dev deals (and Verizon made some indications to Silicon Valley startups it was moving in this direction prior to the rate hike announcement), then it will be giving preferential treatment to one source of information over the other.

What if Verizon were charging the Obama campaign 3 cents per SMS message right now, but cut a deal with the McCain campaign to charge one cent per SMS? That is just a stark example, but you see where this can go. What if it charges the New York Times one rate, and the Wall Street Journal another? It becomes a freedom of speech issue. That is why it is better for the mobile carriers to charge consumers directly (and consistently), rather than try to sneak around and get an extra three cents per message from the Web content companies.

(Photo by Ti.mo).