Scary, if you're a telephone company

Jenna Wortham has an article in The New York Times about the threat of free email:

At a time when e-mail and many other forms of electronic communication are essentially free, wireless carriers are still charging as much as twenty cents to send a text message to a phone, and another twenty cents to receive it. Paying so much to transmit a handful of words is starting to look as antiquated as buying stamps.
There are now a growing number of ways to bypass text-message charges using an internet connection, much as Skype allows people to make calls without relying on a traditional telephone line. If these services catch on in a big way, analysts say, they could take a big bite out of the profits that text messages generate for wireless carriers.
Apple plans to introduce a new service called iMessage (photo), which could quickly become the biggest fish in this pond. The service lets iPhone owners send messages with text, photos, and video to other iPhone owners over a Wi-Fi or cellular data connection. The service, part of an update to Apple’s iOS mobile operating system, will automatically handle messages sent between iPhone, iPad, and iPod Touch users who have upgraded to the latest software.
“There’s a huge amount at stake here,” said Craig Moffett, an analyst at Sanford C. Bernstein, who covers the telecommunications industry. “They are undermining the core business model for an industry that makes most of its money from services that are high priced and low bandwidth, like texting.”
The basic idea is the same with both old- and new-style messages: short bursts that pop up almost instantly on the recipient’s phone. But the path that they take is different. A text message is sent over cellular networks. Services like iMessage transmit messages over the carriers’ data networks and the internet, much like email. Cellphone customers pay for each text message or sign up for a texting plan, while the newer messages will fall under a customer’s wireless data plan.
More than two trillion text messages are sent each year in the United States, generating more than $20 billion in revenue for the wireless industry. Verizon Wireless alone generates as much as $7 billion a year in revenue from texting, or about twelve percent of the total, Moffett said, and texting brings in about a third of the operating income.
This highly profitable product was something of a happy accident for cellphone carriers. Srinivasan Keshav, a professor at the University of Waterloo who studies mobile computing, said text messages were almost an afterthought when cellphone standards were being developed in the late 1980s. Professor Keshav said wireless operators realized there was enough spare capacity in a special control channel on voice networks to also shuttle short messages around. “They could piggyback on the phone railway,” he said, which let the carriers deliver messages cheaply. Professor Keshav estimates it costs the carriers about a third of a penny to send text messages. Considering that the major carriers charge ten to twenty cents to send and receive them, “it’s something like a 4,090 percent markup,” he said.
At twenty cents and 160 characters per message, wireless customers are paying roughly $1,500 to send a megabyte of text traffic over the cell network. By comparison, the cost to send that same amount of data using a $25-a-month, two-gigabyte data plan works out to 1.25 cents.
Over time, analysts say, the new messaging services could cut into the amount of money that carriers can make from each of their customers. They point to examples where the slide has already begun, such as in the Netherlands, where the popularity of social networks and messaging applications have shrunk texting traffic and eroded profits.
Analysts say Apple is trying to duplicate the success of services like BlackBerry Messenger, a free application for BlackBerry smartphone owners that lets them send messages back and forth as in an instant-messaging conversation. It has engendered loyalty among BlackBerry users and has kept some from switching to an Apple or Android device.
“BlackBerry Messenger is the stickiest feature of the BlackBerry experience, even more than email,” said Roger Entner, an analyst at Recon Analytics who follows the wireless industry. “Once you have that, you are considerably less likely to switch away from the consumer experience. IMessage makes the whole iOS universe more valuable.”
Because iMessage will work only between iPhones, iPod Touches, and iPads, at least at first, it is not clear whether it will inspire customers to ditch their text-messaging plans. And Apple devices account only for five percent of the texting traffic sent each year, said Chetan Sharma, an independent mobile analyst. “But if Apple makes iMessage open and available on other platforms, you could see a much bigger impact,” he said.
History has shown that Apple has a way of shaking up the mobile industry by carving out a path to success that causes other hardware makers to follow in its footsteps. “Anything that Apple does, by definition, does not fly under the radar,” Entner said.
Both Samsung and Google are reportedly working on services that would allow owners of their phones to swap free messages. Analysts anticipate that Microsoft, which is acquiring Skype and GroupMe, a popular mobile messaging application, will soon incorporate both services into its new line of Windows smartphones. And other downloadable apps like TextPlus, WhatsApp, and Kik are gathering a following among people looking for cheap ways to chat with friends.
One such service, called Pinger, says it has nineteen million members in the Unites States alone. The company says it has handled more than fifteen billion text messages since it began offering its service in 2009. “It always comes down to the economics,” said Greg Woock, the chief executive of Pinger. “Free is a compelling price point.”
Analysts say the wireless carriers are trying to ready themselves for the coming shift. AT&T recently started requiring new subscribers to choose between two texting plans: pay $20 a month to send unlimited text messages or pay twenty cents for each message sent and received. The company will no longer offer a plan that charged users $10 a month for a thousand text messages. This is apparently aimed at pushing customers toward a pricier plan even if they are not heavy texters, shoring up AT&T’s texting revenue for now. The company declined to discuss messaging services.
Brenda Raney, a spokeswoman for Verizon Wireless, said the company views social messaging as being complementary to other features on the phone. Customers will use a combination of text messages, iMessage, email and the like, she said. “From a business perspective, customers still need a data plan to connect to a device,” Raney said. “They are only making choices on how they are using the data.”

Rico says that You Know Who undoubtedly had a hand in this and, even dead, is still kicking ass...

But the understatement of the year has to be: "Free is a compelling price point"...