Termination Fees

One of the unfortunate things about working on MMS is that inevitably the discussions are always framed by client's understanding of SMS. The SMS market has come a long ways since my time at Proteus ('99-'04) where we were able to create some of the first large scale TV to SMS campaigns. It was always a challenge trying to find the right commercial deal between the parties involved. Sometimes it was the carriers who paid, other times it was the content owner. It was clear that SMS was a technology that would benefit both sides so fortunately, in the end, someone always paid. In the years that followed, as the SMS volume increased, the costs began to decrease. Eventually we've arrived at a place where those with the highest volume have ended up paying a fixed fee effectively driving the incremental cost of additional messages (above that fixed fee volume) down to zero.

The marginal additional cost structure has led to some exciting new models. Why not strike a 50/50 advertising deal if you aren't paying a per unit cost for each message? I would. Unfortunately, this has skewed the perspective of new market entrants (and old) to think that SMS is free. In actuality, there are still cost involved. While this models are still in relative infancy, the are incredible attractive to new market entrants.

Here is the catch. The operators were never consciously on board with the fixed cost deals the aggregators have put forth. In Q4 of 2008, a Verizon Memo was leaked suggesting that a $0.03 per message termination fee should be implemented. This would put pretty much all advertising deals under water. At a $12 CPM, the parties are splitting $0.012 per message losing the provider $.024 per message. Not attractive. You can see even a termination fee of $.01 would be a losing proposition at the current CPM rates. I'm really concerned.

Now back to MMS. The market is conditioned to think about messaging from the perspective described above. Unfortunately the cost structure for MMS is still in its infancy. Much like the early days of SMS, it is unclear what those cost *should* be and who should be bearing them. Trying to cram an advertising model into this situation is very challenging. Eventually I believe that the cost structure will rationalize and the models will appear, but in the meantime it remains quite tricky.

It will be very interesting to see what happens if and when the carriers implement termination fees for SMS messages. I believe it will happen in 2009 and the industry is going to be in for an unfortunate correction. On the brighter side, I believe then MMS will begin to shine as the advertising units are way more interesting and effective.