Table of Contents
Mobile operators charge companies to access their SMS networks. These charges, commonly known as pass-thru fees, are immune to the sender’s purchasing power. In fact, pass-thru fees exemplify the asymmetry unique to the telecom industry.
In messaging, a carrier has absolute control over a subscriber’s phone number. The only way to reach a Verizon phone number is through Verizon. If Verizon decides to block an A2P text from reaching that number, there are no workarounds like those available in email, payments, or web hosting.
In email, for example, if Google blocks access to a Gmail account via ConstantContact’s servers, you can switch to another email service or cloud provider, or request a different email address from the user. In payments, if Visa denies a transaction or if Apple Pay is too expensive, alternatives like Mastercard, American Express, Discover, or even Diner’s Club are available. If all card payment networks block you, you can still transact via ACH, check, or crypto. However, if Verizon or AT&T blocks your text message, you are out of options.
How this came to be is routinely and pointlessly debated. We will refrain from ideological polemics and describe instead the economics this dynamic creates.
The Economics of Pass-Thru Fees
A message provider’s Cost of Goods Sold (COGS) has in it the fees owed to the downstream provider. If you’re an Inter Carrier Vendor (ICV) or an Direct Connect Aggregator (DCA) this includes the Monthly Recurring Charges (MRC) and the Non Recurring Charges (NRC) you pay the carrier, your cloud hosting fees directly attributable to message sending and other costs. The biggest line item however are the per-message fees you pay the downstream carrier.
In every other cost, the greater the purchasing power, the better the unit-of-economics. At some point you lock-in the best rates from your cloud provider; at some point you achieve most-favored-nation status from Visa; but not so with pass-thru fees. Your first text message costs the same as your billionth.
The big enterprises however, the Ubers, the Doordashes, and the United Airlines start squeezing their ICV or DCA for every last 1/100th of a penny. In response, these vendors give them the best possible price for the services they offer, but also pass through (hence the term) carrier surcharges for the traffic. Doing so not only brings more pricing transparency, but also preserves margins.
Pass-thru fees depend on the medium (Short code, 10 DLC, or Toll-Free), the type of messages (SMS/MMS), and the carrier. You can ask your provider for a copy, or check this helpful Bandwidth.com article.
If your messaging partner gives you pricing that doesn’t separate out the pass-thru fees you’re either an SMB or midmarket player or your volumes don’t justify the split. Alternatively, you could be using the partner in vertically integrated ways like Klaviyo, Postscript, or Braze instead of just a conduit.
Why Not Eliminate the Middleman?
In business it pays to get rid of the middleman, so it would make sense, at some point every large sender should have a direct connection to a carrier. There are two reasons why this isn’t easy. First, the financial outlays are non-trivial. There are minimum commitments of business per carrier that have to be honored. You would go from one minimum commit with one DCA to having minimum commits to multiple carriers.
Secondly, there are operational requirements like a fully-staffed near-real time response team to handle escalations, and quarterly business reviews (QBRs) etc that add more bureaucracy and process. This effort goes both ways; not only is the sender going from having one provider to many for the same traffic, but the carrier has one more relationship to manage.
I advise my clients to do the math on the savings, but also the operational load it will add to the organization. It costs money to realize the savings. Is payoff big enough to justify the efficiency gain? For example, would they rather spend the money on spinning up a 24/7 CarrierOps team or investing in R&D or Sales & Marketing?
Even if there is financial and organizational will to make a deal with the carrier, the willingness may not be reciprocated.
Managing a network is a thankless job, and the carriers will not add to that burden unless there is a compelling argument to do so. They get their fees regardless if the sender is directly connected or coming from an intermediary. What’s their incentive to take on the ops load?
In rare cases, it makes sense when there’s a larger partnership at play, for example Apple and Google where you’re also the source of major business for data & devices. However, you have to be Apple or Google to get such a deal.
Securing a direct bind is not impossible, but it is extremely difficult, which is why there will almost always be at least one intermediary between the sender and the carrier. This challenge is also why a direct bind remains the single most irreplaceable asset for a messaging company.
Sidebar: Attention is Expensive
In no other platform is the relationship between the user ID and the user as strong as that between the phone number and the subscriber. Thanks to near-universal number portability, the relationship between the subscriber and their phone number is unshakeable. It is stronger than that of their relationship to email, or a credit card number. When every other form of attention seeking costs seven to nine times more, access to the phone number is a guarantee of attention that doesn’t break the bank. It is also the reason why the pragmatic purchaser will pay pass-thru fees even while the ideologue decries its existence.
Finally
I’ve tried to find other industries with a similar dynamic and haven’t found an exact match. Even the oligopoly-like payments network exhibits some sensitivity to size. In SMS, however, pass-thru fees act as a market equalizer. Because they are size agnostic, it doesn’t matter whether you’re Twilio, Sinch, or the next startup—you receive the same rate from the carrier as everyone else.