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US customers sent 2.2 trillion text messages in 2020. In other words, the wireless operators have created a big party—one which application developers, marketers, and software companies are vying to gain access.
SMS messaging is the textbook example of interoperability. Every wireless carrier commits to support SMS. Thanks to this commitment, all devices on every network globally can send and receive text messages. This is true for cell phones that are part of your handheld, in your car, or the millions of internet-enabled devices around the world.
In Know Whose Party You’re Crashing, we saw how startups often need to work with the platform of the dominant player. If the player were hosting a party, we discussed how important it was to know the rules. This week we continue that journey and discuss SMS in that context.
A Non-Technical Discussion
The simple description can cover most of the landscape but not describe it entirely. Yet, too many details can unnecessarily clutter the picture and obfuscate the big idea. I learned this first-hand as I tried to explain to multiple M&A clients the economics of messaging.
What follows is a top-down, big-picture description of how SMS works. The goal is to share enough about how SMS works to have a meaningful conversation about why it is a big deal.
SMS, MMS, Text Messaging, Texting, and Messaging are used interchangeably. And while any technical topic is acronym heavy, here they are used when there is either no simpler way to describe the concept or when knowing the acronym is necessary for understanding.
Defining P2P & A2P
In SMS there are two networks. One that enables one person to send a text message to another person. Enabled by cooperative interoperability between carriers and with device manufacturers, this is Person-to-Person or P2P messaging.
The second is a blend of cooperative and indifferent interoperability that allows applications to send text messages on the network to people. In the purest sense, this is Application To Person (A2P).
The distinction between P2P/A2P works well to describe messaging in the EU and the rest of the world. The North American market has a slightly different take on the distinction wherein if an application behaves like a person in terms of messaging frequency, it is still considered a P2P participant. More on this in a future post when we discuss Twilio and how it transformed the A2P market.
The critical relationship to remember is that A2P rests on top of P2P. It derives all its power from the utility-like predictability that P2P text messaging enjoys.
A2P is the invite to the P2P party. To understand how the invite works, we need to know how text messaging works.
The P2P Message Flow
There are two types of P2P messages. On-net communication is when both users are on the same network or have the same wireless provider. Off-net communication is when both are on different networks.
Managing a network is a thankless job. Thanks to the universal interoperability requirements, dropped calls and undelivered messages plague even the most sophisticated network operations. This, combined with sovereignty laws around roaming and antitrust, means a text message takes a longer route to reach the destination than one might think.
When a destination is not on its network, the carrier outsources delivery to an Inter Carrier Vendor (ICV). These ICVs take over message delivery. Like the Swiss clearinghouse of messaging, they ensure timely delivery and billing and charge a small fee. No more than fractions of pennies per message, it quickly adds up to a big, profitable business for the ICV.
P2P messaging is a high-quality network. It’s extensive, expansive, and has been operational for at least two decades. This marvel of interoperability has allowed SMS to become the genuinely cross-platform, cross-device, pan-geo, and cross-generational medium.
The A2P Message Flow
Using SMS to deliver your message is extremely attractive compared to the noisy world of push notifications and email. Application developers wanted in on the action and were willing to jump through the hoops carriers set for them.
There are two ways to send A2P messages. One via 5-6 digit short codes, and the other is via regular long codes.
Shortcode messaging, or sending messages in bulk, is accomplished via aggregators. Aggregators exist because if the carriers connected with every application that wanted to send a message, they’d have an unmanageable network. So they delegated this effort to the aggregators. In an example of cooperative interoperability, the carriers made the aggregator the one-stop shop for all application traffic.
The origin story for long-code based messaging isn’t well documented or well known. Perhaps it was a one-off use case or the ICV’s desire to add revenue, but they decided to offer selective connectivity to the P2P network. In an example of indifferent interoperability, the carriers were aware of it but didn’t explicitly sanction it. As long as the ICV ensured legitimate use, the carriers didn’t mind the traffic.
The A2P Operational Burden
A2P interoperability brings additional stresses to the P2P network. First, given that it is an application at one end of the conversation, it is effortless to flood the network with unwanted messages. This can cause customers to complain and leave.
In P2P networks, both sender and receiver are vetted by the same KYC (Know Your Customer) process. In A2P, each application has its KYC process. Combined with the proliferation of use cases, the carriers find it increasingly challenging to control unwanted messages.
For example, in the US, TextNow and TextPlus won endorsements from carriers because of the network effects these innovators created for them. On the other hand, GroupMe (now Skype) was different enough that the carriers had to make exceptions to function.
Soon carriers found themselves policing content instead of connections, use cases instead of content. This increased the operational burden for a part of their business that has become little more than a cost center.
The Wireless Operator’s Challenge
Text messaging does not make any meaningful money for the carriers, given the overall size of the subscriber business. It hasn’t for a decade or more and shows in endless Unlimited Texting plans they offer.
Every carrier has tried to be more than just the wireless signal provider and failed. AT&T with DirectTV, Verizon with AOL, and Yahoo are recent reminders of audacious moves and spectacular failures. These days their main revenue growth streams are device sales and data plans.
Carriers are constantly fighting the tyranny of low switching costs. Most devices, plans, and services are similar. It is therefore straightforward to switch providers. As such, their best hope to keep a customer (outside of contractual lockdowns and deep device discounts) is to deliver high Quality of Service (QoS).
This means spending the money to upgrade networks (I haven’t heard of startups lining up to build 5G radio towers) and ensuring a pristine voice & text experience. As a wireless operator, you do everything to ensure complaints about unwanted texting don’t inundate your customer service teams.
As such, the wireless operator has a tough job. They’d rather not give anyone access to their P2P network because there’s little money in it for them, and they have to do all the policing of the networks. Yet, they can’t take away access because of the vocal blowback by businesses like health care providers, schools, and package delivery companies. Regulatory oversight usually follows when you shut down wholesome use cases that customers want.
In their minds, they worked hard to win the customer relationship and build a product that the customer wanted. And everyone (i.e., A2P developers) wants to ride that relationship to develop their businesses.
The A2P developers are also aware of the absolute control carriers have on their distribution channels. There is only one way to get to an SMS inbox—through the carrier to which the device is connected. If Verizon decides to block an A2P message, there is no way to deliver the message via AT&T or T-Mobile. You have to work with Verizon.
Finally
The A2P/P2P interoperability is the crossroads where the conflicts and opportunities in text messaging meet. Not only do you have adversarial goals, but you have multiple high-growth markets colliding. This crossroads is where entrepreneurship meets opportunity.
It was Marconi who said, “when wagering on the future of new wireless technology, always bet on the optimists—eventually, they’re going to be right.” Next, we’ll discuss the two companies founded by optimists and how they changed the course of the texting industry.
I would love to hear your thoughts. Share them on LinkedIn, Twitter, Instagram, or Substack.
Author’s Note: This is the second installment on interoperability. Links to the entire series: I, II, III, IV, V, VI