Examining the A2P SMS Termination Market in the UK

By Nicholas Rossman, The Mobile Ecosystem Forum

Application-to-person (A2P) SMS messaging has become a ubiquitous communication channel for businesses and organisations to connect with customers¹. The global A2P messaging market is expected to grow from USD 32 billion in 2022 to USD 43 billion in 2027, demonstrating the continued demand for this communication channel ². However, this growth has been accompanied by concerns regarding rising wholesale termination rates – the charges providers levy when a call originating from one network terminates on another network.

Ofcom, the UK's communications regulator, has observed significant increases in wholesale A2P SMS termination rates charged by Mobile Network Operators (MNOs) since 2021, ranging from 15% to 75% ¹, prompting an investigation into the competitive landscape of the A2P SMS termination market with new regulatory measures, including price caps on the cards.

Price Caps

Ofcom's assessment of the A2P SMS termination market has provisionally found that MNOs have Significant Market Power (SMP) in this market ⁵, granting MNOs the ability and incentive to increase termination prices to potentially excessive levels ¹. To address this concern, Ofcom is proposing to impose a price cap on A2P SMS termination charges.

Ofcom believes that this price cap will promote competition in the A2P SMS market, leading to several benefits:

Reduced costs for businesses and organisations: By limiting termination charges, the price cap should help keep down the amount businesses pay for A2P SMS messaging services ⁶.

Increased efficiency in the public sector: Lower A2P SMS costs could lead to increased efficiency in public services, such as the NHS, by reducing missed appointments and improving communication with citizens.

Innovation in the business messaging market: The price cap could encourage innovation by fostering a more competitive environment for MSPs and aggregators to develop new services and solutions.

However, some stakeholders have expressed concerns about the potential impact of price caps. One argument is that price caps could disincentivise investment in network infrastructure and innovation by reducing the revenue generated from A2P SMS termination. Another concern is that price caps could lead to a decline in the quality of service, as MNOs may have less incentive to maintain high levels of network performance.

International issue

Since mid-2021, 90% of mobile operators globally have increased their international SMS fees, with over one-third implementing rate increases exceeding 100%, and approximately 3.9% raising rates by more than 500%. In certain markets, brands are now paying over $0.25 to send a single SMS, prompting them to explore alternative communication channels ⁷. The differences in pricing strategies are partly due to the adoption of origin-based pricing models, where operators charge higher rates for messages originating from international sources compared to domestic ones. This approach aims to boost revenues but has led to inconsistencies and unpredictability in A2P SMS pricing across different regions. This disparity in pricing is seen as another justification for the need for regulation to ensure fair and competitive market conditions.

While SMS remains a primary channel for A2P messaging, it's important to acknowledge the role of alternative messaging channels. SMS A2P messages have the advantage of being delivered without an internet connection, unlike third-party apps like WhatsApp ². This makes SMS particularly reliable for critical notifications and time-sensitive messages. However, the increasing popularity of OTT apps presents a significant challenge to traditional SMS providers ².

Challenges to A2P SMS Revenue

OTT messaging channels like WhatsApp, Viber, and RCS are reshaping the A2P SMS market ⁸. These services offer businesses low-cost or free alternatives, forcing MNOs to confront mounting competition and re-evaluate their pricing strategies. The increasing popularity of these OTT platforms, coupled with the sharp increase in international termination rates, is a major factor contributing to the decline of A2P SMS ⁴.

Hyperscalers, such as Apple, Google, Amazon, and Meta, are moving away from SMS-based authentication, contributing to significant revenue losses for MNOs ⁸. This shift away from SMS is further illustrated by the projected decline in global A2P SMS traffic, which is expected to fall from 1.9 trillion in 2023 to below 1.5 trillion by 2029 ⁹.

Understanding these trends

The Mobile Ecosystem Forum (MEF) conducted a survey of its members across Europe, the US, South America, Africa, and globally. The survey revealed the following key insights:

Decline in SMS Volumes and Revenue: Most respondents reported a decline in SMS volumes and revenue.

Timing of Decline: While a slow decline began around 2019, a major decline started in 2023.

SMS Traffic Types Affected: The decline impacted various traffic types, including OTPs, notifications, and marketing messages.

Reasons for Traffic Decline: Key reasons cited include pricing/SMS costs, a decline in trust due to Artificially Inflated Traffic (AIT), service terminations, channel switching, and the adoption of alternative channels, particularly WhatsApp, due to pricing and trust concerns.

Estimated Rate Increases: International rate increases were estimated between 40% and 500%, while domestic increases ranged from 0% to 100%. Across all markets, the estimated increase since 2022 was around 10%.

Measures Taken to Mitigate Decline: Members reported measures such as onboarding new clients, increasing rates, blocking non-authorised SMS (e.g., AIT, voice OTP, flash calls, and SIM swap), and onboarding RCS.

Main Channel Shift: WhatsApp was the primary alternative channel, followed by other OTT platforms, RCS (less significant), app push notifications, and flash calling.

Recommendations to Preserve the SMS Channel: Survey respondents emphasised the need to educate all market stakeholders (MNOs, aggregators, etc.) about the situation, review rates with MNOs, and develop a communication plan for migrating to RCS.

Impact of Price Caps

Price caps can lead to lower costs for businesses and organisations that rely on A2P SMS messaging ⁶. This can be particularly beneficial for small businesses and public sector organisations, which may have limited budgets for communication services. Lower prices can enable these entities to utilise A2P SMS more effectively for various purposes, such as appointment reminders, service updates, and customer communication.

By limiting the pricing power of MNOs, price caps can create a more level playing field for MSPs and aggregators, potentially leading to increased competition and innovation in the market ⁶.

Price caps could potentially disincentivise investment in network infrastructure and new technologies by reducing the revenue generated from A2P SMS termination. This could have long-term implications for the quality and reliability of A2P SMS services. If MNOs have less incentive to invest in their operations and technical solutions including services such as the protection against cyber-attacks on the bearer of SMS messaging the SS7 signalling system.

There is a risk that price caps could be influenced by lobbying efforts from dominant players in the market, leading to regulations that favour incumbent players and stifle competition. This could hinder the entry of new players and limit the development of innovative services.

Alternative Pricing Models for the A2P SMS Termination Market

Besides price caps, there are alternative pricing models that could be considered for the A2P SMS termination market. These models aim to address the challenges of rising costs and potential anti-competitive behaviour while fostering a more sustainable ecosystem. Some of these models include:

Revenue Sharing: This model involves sharing the revenue generated from A2P SMS termination between MNOs, aggregators, and MSPs. This could incentivise collaboration and ensure that all value chain players benefit from market growth. By aligning the interests of different stakeholders, revenue sharing could promote a more balanced and sustainable ecosystem.

Tiered Pricing: This model involves setting different termination rates based on the type of A2P SMS message ⁸. For example, higher rates could be applied to messages that require high levels of security or deliverability, such as one-time passwords (OTPs) for financial transactions, while lower rates could be applied to marketing or promotional messages. This differentiated pricing approach could reflect the value and urgency of different message types.

Usage-Based Pricing: This model involves charging termination rates based on the volume of A2P SMS messages sent. This could encourage businesses to optimise their messaging campaigns and reduce unnecessary traffic. By incentivising efficient messaging practices, usage-based pricing could help manage network capacity and reduce costs.

The potential revenue loss of $14.36 billion by 2027 due to high international termination rates highlights the need for alternative pricing strategies ¹⁰. By exploring these alternative models, the industry can potentially mitigate the negative impact of rising costs and ensure the long-term viability of the A2P SMS market.

However, the A2P market has built a resilient market with the simplicity of the wholesale of SMS termination fees. A complete rethink of the market would require a complex change across the long value chain of A2P services. Even disruptors like OTT players have favoured the simplicity of this model. It seems unlikely that changes in the A2P business models will be welcomed by the industry unless they are gradual and optional.

Security and Compliance

To combat spam and fraud, UK network operators have implemented measures to enhance security and compliance in the A2P SMS market. Effective August 31, 2023, international SMS messages sent to virtual numbers with the UK country code (+44) are blocked ¹¹. This initiative aims to ensure that A2P messaging is conducted within regulatory best practices and with appropriate anti-spam and anti-throttling mechanisms.

International Regulation for A2P SMS

So far, there is no concrete evidence that other countries plan to implement similar price caps. However, Ofcom's move could set a precedent, potentially influencing regulators in other regions to consider comparable measures, especially if they observe benefits such as market stabilisation and protection against excessive pricing. The regulatory environment for the A2P SMS termination market varies significantly across European countries.

Not all regulators have the same framework for regulation.  In the UK, Ofcom has the power to impose regulatory conditions on communications providers that have SMP in a specific market ¹². In other European countries, regulation of the A2P SMS termination market ranges from minimal intervention to more active measures, such as price caps or mandatory interconnection requirements.

In France, regulator ARCEP has proposed further regulating the SMS termination market. The European Commission is currently investigating this proposal due to concerns about its potential impact on competition ¹³. This highlights the potential for regulatory intervention to have unintended consequences, such as hindering the development of alternative messaging services and potentially reducing consumer benefits ¹³.

Conclusion and recommendations

The A2P SMS termination market in the UK is at a critical juncture. Rising wholesale termination rates have prompted Ofcom to propose price caps to address competition concerns and protect businesses and consumers. While price caps could potentially lead to lower costs and increased competition, there are also concerns about their potential impact on investment and innovation.

The A2P SMS termination market is dynamic and evolving, with new technologies and services emerging. The future of this market will depend on the interplay of various factors, including regulation, competition, and innovation. The increasing popularity of OTT messaging apps presents a significant challenge to traditional SMS providers, driving the need for innovation and alternative pricing strategies.

Regulators should carefully consider the potential impact of price caps on investment and innovation. Regulations should be flexible and adaptable to accommodate new technologies and services. Consideration should be given to the benefits of SMS to consumers and enterprises: the universality of the A2P SMS communication service is unmatched. The long-term implication of the intervention should not limit the availability of a service so important to some of the most vulnerable parts of the communities.

Industry Players should invest in technologies to combat fraud and improve the security of A2P SMS, collaborate with other stakeholders to develop industry standards and best practices, and explore alternative pricing models that can ensure fair compensation and incentivise innovation.

It is crucial for stakeholders, including regulators, MNOs, aggregators, and MSPs, to engage in constructive dialogue and collaborate to develop solutions that promote a healthy and competitive A2P SMS termination market that benefits businesses, consumers, and the wider economy. By working together, the industry can ensure the long-term viability and value of A2P SMS as a critical communication channel.

ABOUT THE AUTHOR

Nicholas Rossman is a Programme Director at the Mobile Ecosystem Forum (MEF). MEF is a global trade body established in 2000 and headquartered in the UK with members across the world. As the voice of the mobile ecosystem, it focuses on cross-industry best practices, anti-fraud and monetisation. The Forum, which celebrates its 25^th anniversary in 2025, provides its members with global and cross-sector platforms for networking, collaboration and advancing industry solutions.  

Web: https://mobileecosystemforum.com/

Twitter: https://x.com/mef

LinkedIn: https://www.linkedin.com/company/mobile-ecosystem-forum

Facebook: https://www.facebook.com/MobileEcosystemForum/

References:

1. Consultation: Business messaging – Review of the A2P SMS termination market - Ofcom, accessed on February 12, 2025, https://www.ofcom.org.uk/siteassets/resources/documents/consultations/category-1-10-weeks/review-of-the-a2p-sms-termination-market/main-and-supporting-documents/a2p-sms-termination-consultation.pdf?v=390118

2. The application-to-person messaging market continues to grow steadily, but the position of operators is weakening - Analysys Mason, accessed on February 12, 2025, https://www.analysysmason.com/contentassets/8577100e5944467cafe13388510e4219/analysys_mason_a2p_market_growth_mar2023_rdmv0.pdf

3. The True Cost of SMS Spam: A Case Study | Cloudmark EN, accessed on February 12, 2025, https://www.cloudmark.com/en/resources/white-papers/true-cost-sms-spam-case-study

4. WORLD TELEMEDIA 23 A2P SMS set to peak in 2026, with WhatsApp, AIT and pricing undermining the business model - Telemedia8.1, accessed on February 12, 2025, https://www.telemedia8point1.com/world-telemedia-23-a2p-sms-set-to-peak-in-2026-with-whatsapp-ait-and-pricing-undermining-the-business-model/

5. Ofcom UK Propose to Cap the Wholesale Price of Bulk Business Texts - ISPreview, accessed on February 12, 2025, https://www.ispreview.co.uk/index.php/2025/01/ofcom-uk-propose-to-cap-the-wholesale-price-of-bulk-business-texts.html

6. Consultation: Business messaging - Review of the A2P SMS termination market - Ofcom, accessed on February 12, 2025, https://www.ofcom.org.uk/phones-and-broadband/mobile-phones/a2p-sms-termination-market/

7. Sky-high SMS rates damaging long-term opportunity for A2P SM, Mobilesqaured, accessed on February 19, 2025, https://www.mobilesquared.co.uk/2023/09/14/sky-high-sms-rates-damaging-long-term-opportunity-for-a2p-sms-brand-spend-on-channel-to-fall-from-2024/

8. The Future of A2P SMS: Challenges, Opportunities, and the Path Forward for MNOs, accessed on February 12, 2025, https://www.openmindnetworks.com/blog/a2p-sms-pricing-strategies-mnos/

9. Global Enterprise Losses to AIT to Halve Over Next Five Years - Juniper Research, accessed on February 12, 2025, https://www.juniperresearch.com/press/enterprise-losses-to-ait-to-halve-over-next-five-years/

10. Surging SMS rates damages long-term opportunity for A2P SMS, says Mobilesquared, accessed on February 12, 2025, https://www.capacitymedia.com/article/2c7gr4e47p7xe8obdy3nk/news/surging-sms-rates-damages-long-term-opportunity-for-a2p-sms-says-mobilesquared

11. Complying with A2P Guidelines - UK - Global Relay, accessed on February 12, 2025, https://community.globalrelay.com/help/s/article/Complying-with-A2P-Guidelines-UK

12. Ofcom Proposal to Cap Wholesale Prices of Business Bulk Texts Open for Consultation | Preiskel & Co, accessed on February 12, 2025, https://www.preiskel.com/ofcom-proposal-to-cap-wholesale-prices-of-business-bulk-texts-open-for-consultation/

13. European Commission opens in depth investigation into French proposal to continue regulating SMS termination market | Shaping Europe's digital future, accessed on February 12, 2025, https://digital-strategy.ec.europa.eu/en/news/european-commission-opens-depth-investigation-french-proposal-continue-regulating-sms-termination

Noticias Relacionadas: