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Page 1: Sustaining A2P SMS growth while securing mobile networks · Anam’s patent-protected SMS Home Router product forms the core of its solution portfolio and provides an intelligent

Sustaining A2P SMS growth while securing mobile networksHarnessing pricing elasticity to optimize enterprise messaging revenues

Sponsored by

Page 2: Sustaining A2P SMS growth while securing mobile networks · Anam’s patent-protected SMS Home Router product forms the core of its solution portfolio and provides an intelligent

2© 2015 Ovum. All rights reserved. www.ovum.com

ABOUT MBLOXMblox is the largest application-to-person (A2P) mobile messaging provider in the world, and is trusted by more companies to carry their mission-critical traffic than any other service. As the industry’s most experienced tier-1 SMS aggregator, it specializes in the unique demands of large-scale mobile messaging programs and is known for providing reliable, uncompromising connections. By creating positive brand experiences, it helps clients transform numbers into profitable relationships with loyal customers.

ABOUT ANAMAnam Technologies’ expertise is in core SS7 technology and the company is a provider of the most innovative and intelligent mobile messaging security solutions available today. Anam Technologies’ team members have a wealth of experience in wireless messaging. Its aim is to offer service-oriented solutions that allow mobile operators to provide an enriched and more secure messaging experience for their customers. Its solutions are designed to be easily integrated into the network or deployed as cloud-based services.

Anam’s patent-protected SMS Home Router product forms the core of its solution portfolio and provides an intelligent transparent routing platform facilitating many services and applications in network and personal security, revenue assurance, personalization, and message delivery engines.

Anam Technologies is a private company headquartered in Dublin, with offices in London, Dallas, Kuala Lumpur, Hong Kong, and Hanoi.

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3© 2015 Ovum. All rights reserved. www.ovum.com

Summary..........................................................................................................................................................5

Catalyst ..........................................................................................................................................................5

Key findings ...................................................................................................................................................5

Enterprise market engages with SMS .............................................................................................................6

The growth of A2P traffic ..............................................................................................................................6

The evolving ecosystem makes A2P SMS easier to access .........................................................................9

Illegal SIM farms threaten the A2P SMS revenue opportunity ....................................................................9

An unintended consequence… ...............................................................................................................10

…With a substantial downside ................................................................................................................10

The trouble with grey routes ......................................................................................................................10

Closing networks to secure enterprise messaging revenues ...................................................................11

Revenue assurance platforms and SMS firewalls play key strategic role ................................................12

False positives and acknowledgments are a big negative .........................................................................13

Closed networks deliver quick ROI and high profits ..................................................................................14

The new price has to be right .....................................................................................................................14

Revenue assurance, not reduction ............................................................................................................15

Affordability Index: calculating the A2P SMS pricing sweet spot ..............................................................16

Belgian MNOs could more than double revenues by lowering their A2P SMS price ..........................17

MNOs in India will increase revenues by increasing A2P SMS prices ..................................................17

Summary........................................................................................................................................................17

Appendix ........................................................................................................................................................18

Methodology ................................................................................................................................................18

Contents

© Copyright Ovum 2015. All rights reserved.

The contents of this product are protected by international copyright laws, database rights and other intellectual property rights. The owner of these rights is Informa Telecoms and Media Limited, our affiliates or other third party licensors. All product and company names and logos contained within or appearing on this product are the trademarks, service marks or trading names of their respective owners, including Informa Telecoms and Media Limited. This product may not be copied, reproduced, distributed or transmitted in any form or by any means without the prior permission of Informa Telecoms and Media Limited.Whilst reasonable efforts have been made to ensure that the information and content of this product was correct as at the date of first publication, neither Informa Telecoms and Media Limited nor any person engaged or employed by Informa Telecoms and Media Limited accepts any liability for any errors, omissions or other inaccuracies. Readers should independently verify any facts and figures as no liability can be accepted in this regard - readers assume full responsibility and risk accordingly for their use of such information and content.Any views and/or opinions expressed in this product by individual authors or contributors are their personal views and/or opinions and do not necessarily reflect the views and/or opinions of Informa Telecoms and Media Limited.

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4© 2015 Ovum. All rights reserved. www.ovum.com

About the author

Pamela Clark-Dickson

Pamela Clark-Dickson is a Principal Analyst in Ovum’s Consumer Services practice. Her focus is on mobile messaging, OTT communications, and mobile security and she produces analysis on these areas. Her areas of expertise also include SMS, MMS, email, instant messaging, OTT communications services (including messaging and VoIP), rich communications, the emerging WebRTC market, and mobile security.

Pamela joined Informa Telecoms & Media in 2002 and is the author or coauthor of a number of reports, including Mobile Operators’ Consumer Mobile Security Strategies (January 2014), VoIP and IP messaging: Operator strategies to combat the threat of OTT players (revised and updated May 2013; first edition January 2012), Mobile Content & Services Report (eighth edition 2012), Mobile Messaging 2010 (second edition), Mobile Content & Services Report (seventh edition 2009) and Mobile Games (2005). Pamela is a regular speaker and chair at industry conferences and is frequently called on to provide media comment on topical and trending developments. She has covered the telecoms sector for almost 20 years as an analyst and journalist, and previously worked for Informa Telecoms & Media as a Senior Analyst in the Mobile Content & Applications Intelligence Centre, as Co-editor of the Mobile Media & Messaging continuous research service, and as Editor of the Mobile Messaging Analyst, Mobile Media, and Mobile Games Analyst continuous research services.

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5© 2015 Ovum. All rights reserved. www.ovum.com

Key findings• A2PSMStrafficandrevenuesare

growing as an increasing number of enterprises in multiple vertical industries find value in using SMS as a communications channel to their customers, employees, the general public, and other stakeholders.

• ThegrowinguseofA2PSMSishelping some MNOs to recoup a portion of the revenues that they are losing from their customers’ increasing use of messaging and VoIP applications and services.

•However,mostMNOsareunawarethat A2P SMS traffic is being terminated on their networks via grey and fraudulent routes. This is resulting in revenue leakage, a loss of SMS revenues due to the nonexistence of termination

agreements between the MNO and the party that is terminating traffic on their network.

• Theexistenceofgreyroutesreduces the revenue opportunity for legitimate A2P SMS traffic.

• SomeMNOshavedeployedSMSrevenue assurance platforms and SMS firewalls, enabling them to protect their networks, identify illegitimate traffic, block spam, and ensure that aggregators and enterprises are paying them for SMS termination, thereby increasing ARPU and revenues.

•NorwegianoperatorTelenorhasgenerated $81m in revenues since it deployed an SMS revenue assurance platform in 2007, with the number of SMSs per subscription increasing from 1.9 in 2007 to 13.1 in 1Q14, including

a 22% increase year-on-year in 2013. Telenor’s A2P SMS monthly ARPU also increased, from $0.10 in 2007 to $0.50 in 1Q14.

• ThereisariskthatifMNOschargetoo high a price for A2P SMS they will discourage enterprises from using SMS as a transactional and promotional channel.

• Anindependentsurveyconductedby Ovum has found that, in total, 50% of the enterprise respondents indicated that they would send between two times and four times less traffic if the per-message price of an A2P SMS increased from the industry average of $0.03 to $0.05.

•Ovumbelievesthatthesurveyresults indicate a significantly high level of pricing elasticity, which would bear consideration when

Summary

CatalystMobile network operators (MNOs) are increasingly deploying revenue assurance platforms and firewalls in order to shut down grey and black routes into their networks for the termination of application-to-person (A2P) SMS. Essentially, MNOs are closing their networks to everyone seeking to terminate A2P SMS traffic on them, other than those parties with which the MNO has a specific and pre-agreed A2P commercial agreement. This has helped MNOs to increase their wholesale revenues from the termination of A2P SMS traffic by being able to bill for traffic they had not previously been able to “see” coming into their networks.

However, some MNOs are also starting to increase the price of A2P SMS traffic termination, seeing this as a way to increase their revenues and offset the decline of P2P SMS revenues. The concern is that if MNOs charge too much for A2P SMS traffic termination, enterprise customers will reduce their use of A2P SMS as a channel for reaching their target audience. In particular, Internet brands are concerned that MNOs’ pricing of A2P SMS will reduce the number of viable use cases for the service, potentially leading them to send less A2P SMS traffic and more seriously explore the use of other channels.

Other MNOs are charging too low a price for wholesale A2P SMS. One major consequence is that these MNOs’ revenues are less than optimal. In addition, their networks are a target for messaging spam and fraud. This is a significant problem in its own right, and in turn discourages enterprise use of A2P SMS, further diminishing the wholesale A2P SMS revenue opportunity.

For those MNOs that are deploying revenue assurance platforms and SMS firewalls to close their networks, it will be vital to understand the impact of A2P SMS price elasticity on market development. Of key importance is determining the price at which MNOs can achieve maximum profits while ensuring optimum adoption and utilization of A2P SMS in the business market.

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MNOs are structuring their pricing strategies for A2P SMS.

• TohelpMNOstostructuretheirpricing strategies for A2P SMS in a way that allows them to maximize their revenues, Ovum has worked with Mblox and Anam to develop the Affordability Index for A2P SMS pricing.

• TheAffordabilityIndexusesthetheory of elasticity to calculate the optimal price for an A2P SMS on a per-country basis, that is, the price at which revenue is maximized. It will also enable MNOs to model the impact on their revenues of increasing or reducing their A2P SMS prices.

• TheAffordabilityIndexshowsthatMNOs in Austria, for example, will be able to increase their revenues by more than 60% by reducing their A2P SMS price. MNOs in India, meanwhile, should be able to increase their A2P SMS revenues by raising their A2P SMS price to the optimal point. However, the Index also shows that if the price variation is too high in either direction, revenues will start to fall even as, in some scenarios, traffic continues to climb.

• Itisimportanttonotethatchangesto pricing can take months, and sometimes years, to have an effect on market demand. As such, any radical changes to pricing should be done with patience and care.

Enterprise market engages with SMS

The growth of A2P trafficA2P mobile messaging is a growing, evolving, and vibrant market. As P2P SMS traffic and revenues decline for a number of MNOs due to the increasing penetration of over-the-top (OTT) messaging apps, the use of A2P messaging by enterprises

is increasing. As Figure 1 shows, Ovum forecasts that A2P messaging traffic will total 2.2 trillion events by 2017, representing 31.3% of total messaging traffic. This is up from 1.8 trillion events in 2014 (24% of total messaging traffic).

The continued growth in A2P SMS traffic is borne out by the results from a recent survey conducted by Ovum, which asked enterprise decision-makers about their expectations in terms of monthly volumes of A2P SMS over the coming years. As Figure 2 shows, a high proportion of respondents believed that their A2P SMS traffic would be higher in one, two, and three years from now (40.6%, 50.0%, and 46.9% respectively).

Less than one-third of respondents said that they believed their A2P SMS traffic would be about the same in two or three years’ time, although approximately 40% indicated that they did not think that there would be much change in their monthly volumes of SMS traffic over the next 12 months.

Companies in multiple vertical industries have found SMS a relatively inexpensive, universal, and quick way to communicate with mobile users, or to provide them with content and services. Retailers and brands; fast-moving consumer goods firms; and media, Internet, and telecoms companies were among the first to recognize the potential of SMS.

0

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2017201620152014201320122011

2.212.121.99

1.831.65

1.421.11

A2P

/P2A

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fic (m

illio

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Figure 1: Global A2P SMS traffic, 2011–17

Source: Ovum

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It will be morethan now

It will be about thesame as now

It will be lessthan now

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Figure 2: What do you expect to happen to your average monthly volume of SMS over the coming years?

Source: Ovum

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Companies in other verticals subsequently realized that similar use cases existed for the adoption of A2P SMS within their industries. Consequently A2P SMS is now used extensively in retail, banking and finance, travel and transportation, public sector, and Internet/media organizations (among others), for

various purposes, as outlined in Figure 3. The number of use cases for A2P SMS as a transactional and promotional channel has exploded as business divisions within companies have shared their success stories internally. Enterprises are using A2P SMS to more effectively communicate with or enable transactional

capabilities for their customers, their employees, or the general public; to improve customer relationship management; and to streamline back-end business processes (among other uses).

Ovum also asked survey respondents about their use of various types of A2P SMS: transactional, promotional, one-way, and two-way. As Figure 4 shows, respondents’ use of transactional, promotional, and two-way A2P SMS remained static over the previous 12 months, at 43.5%, 46.8%, and 44.3% of respondents respectively. One-way A2P SMS had increased for a higher proportion of respondents (43.8%); it also saw the smallest decline (20.3%).

Transactional messaging is becoming a frequently-used term to describe messaging that has a “per-message opt-in.” Examples of per-message opt-in include permission from a consumer to send a hotel booking confirmation or a one-time password. A promotional message is one that is usually sent for marketing purposes; in this case, permission or opt-in is given by the consumer for the receipt of unlimited messages until the consumer opts out.

Historically, enterprises have been interested in sending one-way communications using an alpha sender ID, that is, a sender ID that identifies the enterprise by name. More recently, however, enterprises, MNOs and regulators are starting to prefer the use of long-code and short-code sender IDs in order to provide the consumer with the ability to opt-out by replying to the message sent.

Enterprises are using other mobile messaging channels, including

Advertising and marketingSurveys, votingLoyalty, CRMCompetitions, promotionsLinks to social media via SMSEmployee communications and broadcastsOnline status order queriesText4Info, special offersLead generationEmergency broadcastsProduct availability

Text to conciergeMobile check-in/outDeparture informationInquiriesRequest upgrades, customer serviceSpecial offers (e.g., room upgrades, fares)Emergency broadcastsCRM/loyaltyGroup messagingAdvertising and marketingMobile check-out

Real-time account informationFunds transferAlerts, authenticationPaymentsInquiries, queries, and requestsMini-statementsAlertsOpt-in marketingPayment remindersAuthenticationSecure mobile messagingHigh-value transaction notificationsReal-time account information

AlertsStatus updatesAuthentication and validationInformation servicesContent deliveryWall postsSocial interactions

Retail Travel and transportation

Banking and finance Social media

Figure 3: A2P SMS use cases by selected vertical industry

Source: Ovum

Decreased Stayed the same Increased

0

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Two-wayOne-wayPromotionalTransactional

Res

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Figure 4: In the last 12 months, what has happened to your organization’s use of these messaging types?

Source: Ovum

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MMS, email, push notifications, and in-app messaging. However, the wider utilization of these messaging channels is inhibited by a combination of data cost, the penetration of smartphones, the availability of mobile broadband, and the adoption of mobile apps in the target audience. The universal reach and accessibility of SMS, coupled with its relatively low cost (compared

to direct mail or a call center), its high engagement with mobile users, and its reputation as a relatively secure means of transmitting information, mean that enterprises are typically more likely to use SMS as a communications channel.

The commercial use of OTT messaging ecosystems such as Kakao, Viber, Line, and iMessage has

not yet become officially available, although there have been isolated incidents of major spam problems when some companies have attempted to make this work. It is not expected that these OTT providers will risk exposing their ecosystems to enterprises for fear of spam, which may then lead to churn.

Ovum asked survey respondents about their use of alternatives to mobile messaging. Unsurprisingly, a high proportion of respondents already use email, social media, and social networks for transactional or promotional messaging, as Figure 5 shows. A smaller proportion, however, use mobile app messaging – either notifications or inbound messaging – or application messaging services such as WhatsApp or Facebook Messenger. (It is believed that respondents interpreted the question about WhatsApp as it related to their personal use of the technology.) Although 80.3% of respondents indicated that they would use notifications or inbound messaging

Use now Will use one year from now Don’t use/don’t intend to use

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ents

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Figure 5: Do you use or expect to use any of these alternatives to SMS for transactional or promotional messaging?

Source: Ovum

Enterprise

End user

Businesscommunicationsprovider,cloud-basedcommunicationsprovider

SMSaggregator,hub

Mobileoperator

Figure 6: The A2P SMS ecosystem

Source: Ovum

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within a year, only 60.6% of respondents indicated that they would use mobile application messaging services.

The evolving ecosystem makes A2P SMS easier to accessThe development of an ecosystem around A2P SMS has enabled enterprises to more easily access and use the technology. MNOs have typically sold wholesale SMS to tier-1 aggregators and specialist business communications providers, which in turn directly address the enterprise market with SMS connectivity and relevant value-added services. Tier-1 aggregators will also sell these direct routes to tier-2/3 low-cost aggregators that are unable to find cheaper routes elsewhere. Tier-1 aggregators will typically seek to use direct connections to MNOs due to the higher quality and stable dynamics of these routes.

Enterprises could source bulk SMS directly from an MNO, but it would not be economically attractive for the enterprise or the MNO to do so for the relatively small amount of traffic that they wish to send, taking into account the associated management overhead. The aggregator or specialist business communications provider would be able to purchase larger amounts of bulk SMS from the MNO at a correspondingly lower price, thereby allowing the MNO to deal with fewer customers, with correspondingly fewer commercial and support staff. This would enable the aggregator to pass on additional value to the enterprise.

There has been consolidation at the top end of the aggregator market. Global roaming and connectivity providers and multinational enterprise software companies are

adding A2P SMS capability to their existing offerings as they move to embrace the A2P SMS revenue opportunity and to deliver this communications mechanism via the cloud. For example, in 2013 the CRM vendor Salesforce.com acquired cloud marketing platform provider ExactTarget and Oracle purchased Responsys, another cloud marketing platform provider. IBM followed suit in 2014, acquiring Silverpop.

Infrastructure vendors are also part of the A2P SMS ecosystem. Vendors initially provided mobile operators, aggregators, and business communications providers with platforms such as SMSCs and SMS gateways. More recently, vendors have been positioning themselves to directly address the enterprise market. They are acquiring or partnering with aggregators or investing in the development of their own global messaging connectivity networks and enterprise messaging capabilities.

In addition, the advent of cloud-based communications has resulted in the launch of a number of companies that have taken an API-based approach to enabling A2P SMS (and other communications capabilities) for the enterprise. Such companies also typically partner with MNOs, hubs, or aggregators to provide connectivity services for their enterprise clients.

Illegal SIM farms threaten the A2P SMS revenue opportunityInevitably, as the penetration of SMS grew, so too did its use as a mechanism for spam and fraud. Fraudsters are using SMS to illegitimately sell recurring, high-cost subscriptions to information and content; to send spam that tries to persuade users to reply via a premium text or a premium phone call; and

to encourage users to visit mobile websites or download applications that spread viruses or malware.

With the advent of the Internet, fraudsters and spammers have been able to use IP technology to more easily deliver SMS to mobile users over the SS7 international signaling network that connects all GSM MNOs. The SS7 network was originally designed in the 1980s as a closed network, enabling the carriage of services (including voice and SMS) between MNOs only. The IETF subsequently developed protocols enabling the interconnection of SS7 and IP, effectively opening the MNO networks to the use of web-based communications capabilities such as VoIP and the sending of SMS from a PC or a web portal.

Fraudsters and spammers are also able to target mobile subscribers using SIM farms – computer-based systems loaded with multiple SIM cards. The SIM cards are usually bought in bulk and are bundled with price plans that include either unlimited SMS or a large bucket of SMS. The SIM farm operator uses specialized software combined with the bank of SIMs to broadcast SMS campaigns to the target recipients. Depending on the price plan, the recipients will be subscribers of the MNO that owns the SIM card or subscribers of other MNOs in the same country.

SIM farms have emerged as MNOs have closed grey routes by commercializing all direct interconnects and effectively blocking spam on their borders to the SS7 international signaling network. The closure of these grey routes has led fraudsters and spammers to seek alternate, less expensive routes into MNO networks.

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An unintended consequence…The SIM farm is an alternate route that has become prevalent in some countries. The growing prevalence of SIM farms is partly due (albeit unintentionally) to the MNOs’ introduction of low-cost consumer price plans that include unlimited SMS or large buckets of SMS, typically as a response to their subscribers’ increasing use of OTT messaging applications. These price plans are exploited by the operators of SIM farms, which are effectively in breach of the terms and conditions of the consumer contract, including the fair usage policy. In addition, the SIM farm operators are defrauding the MNO, since the MNO is typically unable to distinguish between a P2P SMS and an A2P SMS, and is therefore unable to recoup the costs of terminating what should be higher-value A2P SMS traffic. These types of SIM farms are the most common, and are responsible for the vast majority of SMS spam.

However, there are also instances where an MNO’s enterprise business unit has knowingly sold corporate SIMs or M2M SIMs to a third party that is not an enterprise or an M2M service provider. Often these SIMs are loaded into SIM farm equipment, which means that the SIM farm operator is contractually able to terminate A2P SMS traffic on other in-country MNO networks (or on-net only in the case of M2M SIMs, due to commercial restraints) and could therefore be regarded as legitimate. This situation has generally arisen because the operator’s enterprise sales team was unaware of the full implications of selling these types of SIMs to SIM farms, and consequently did not stipulate that the SIMs could not be used for the wholesale termination of A2P SMS. M2M SIMs are less of a problem for MNOs, with

respect to SIM farms, because they are commercially restricted to allow on-net messages.

Those MNOs that have become aware of the implications of selling corporate SIMs or M2M SIMs have begun to take steps to modify their contracts with the purchasers. This means that the purchaser will no longer be able to resell (or aggregate) SMS using these types of SIMs. However, it may be a delicate, and potentially lengthy, process for the MNO to modify the agreement, depending on the value and the length of the contract.

The failure of MNOs to deploy firewalls, fraud detection platforms, or monitoring platforms is another enabler for SIM farms. It renders them more vulnerable to being targeted by SIM farm operators because it means MNOs have no ability to detect A2P SMS traffic that is originated by these SIMs.

SIM farms have proved very difficult to completely block, even for those MNOs that have deployed firewalls or fraud detection platforms. Most SMS firewalls can detect and block the offending SIMs, but SIM farm operators recycle SIMs on a weekly basis, rendering blocking effective only for a matter of days.

…With a substantial downsideSIM farms represent a significant problem for the telecoms industry because they are a source of SMS spam. They can result in significant revenue losses for MNOs, especially in those markets where national interconnect costs are high. Infrastructure vendors are developing more intelligent platforms that would render inoperable the equipment used in SIM farms, but this technology is not yet mature

enough to block all methods of SIM farm fraud.

Tier-1 aggregators typically do not use SIM farms, mainly because SIM farms do not provide the features that their customers would find attractive. These features include dynamic sender ID, which enables the aggregator to provide an enterprise with a number or a string of letters that is specifically associated with its brand.

However aggregators can often assist in the detection of SIM farms, using testing routes to identify the following characteristics:• lowcost(abouthalfthepriceofa

“legitimate” A2P SMS)• lackoffeatures(random,rather

than dynamic, sender ID)• longlatency• globaltitlesthatidentifythesender

as an in-country legitimate MNO.

It is in the industry’s best interests to prevent the operation of illegal SIM farms, and to move legal SIM farms onto a commercial model. This would involve a delivery infrastructure that ensures the ongoing viability of the A2P SMS channel in terms of generating revenue, reducing spam, providing a better quality of service, and enabling additional features that enterprises would find beneficial.

The trouble with grey routesThe terms white, black, and grey routes are commonly used in the telecoms industry to denote the legality of the routes that are used to send and receive traffic, including voice calls and messaging.

An A2P white route is one where the termination of traffic is legal; for example, where there is a commercial agreement governing the transmission of traffic from the

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source to the destination (including price). Typically these commercial agreements are between MNOs or between MNOs and other entities such as approved aggregators.

An A2P black route is one where the termination of traffic is illegal and achieved via fraudulent means; for example, by faking Global Title addresses or exploiting vulnerable SMSCs. There is no commercially binding agreement between the sender and the receiver that governs the transmission of traffic or its price, and typically a party sitting between the originator of the message and the terminating operator is knowingly trying to deceive or exploit both the originator and terminator of the message. Frequently the originator of the message will not know that a black route is being used. Black routes cause vast discrepancies in roaming and settlement calculations and lead to disputes between MNOs. In most cases these frauds are never fully investigated due to their extremely complex natures. MNOs should deploy SMS firewalls to detect and block these routes.

An A2P grey route is one that is legal but that takes advantage of a loophole in the GSM commercial framework whereby not all MNOs have (or require) a commercial agreement to terminate an SMS. The commercial framework was originally designed to cater for P2P messages where the “sender keeps all” model assumed there would a fair balance of traffic between MNOs. In the world of A2P SMS this is not the case. As a consequence, the loophole creates a scenario where there tends not to be a commercially binding agreement between the sender (a low-cost aggregator, for example) and the ultimate receiver (the MNO), although there may be commercially

binding agreements between multiple aggregators. The introduction of an AA19 interconnect agreement between MNOs, or of an agreement between an MNO and an aggregator, closes this loophole, but also requires MNOs and aggregators to mutually agree and execute the agreement before it takes effect.

Grey routes are typically exploited by low-cost aggregators because they allow these companies to route traffic via a number of intermediary networks in order to achieve the lowest price. However, enterprises using low-cost aggregators that habitually use grey routes run the risk of such routes being shut down by MNOs without notice, resulting in nondelivery of traffic.

The use of grey routes for the termination of SMS traffic is endemic, primarily because relatively few MNOs in relatively few countries are aware that grey routes exist.

The issue is exacerbated by the fact that the market, and the enterprise originators of A2P messages, have come to expect very low prices to some destinations. This leads low-cost aggregators to continually seek out additional grey routes in order to remain competitive, perpetuating the problem.

Closing networks to secure enterprise messaging revenuesOften, an MNO network does not have a standard AA19 termination agreement in place with all MNOs that are connected to the international SS7 signaling network or with those low-cost aggregators that have the ability to terminate traffic on their network. This means the operator is not aware that such traffic is being delivered to its networks.

These non-interworked MNOs will in turn sell these non-interconnected routes to aggregators, which sell them on to enterprises. This scenario results in SMS revenue leakage for the terminating MNO; that is, a situation where an operator is unwittingly allowing SMS traffic to be terminated to its subscribers for which it is unable to bill. In many cases, the aggregator’s customer – that is, the enterprise – is also not aware how its SMS traffic is being delivered or that although it is paying an aggregator to deliver SMS traffic on its behalf, the aggregator and transit MNO may not be paying the terminating network.

Those MNOs that are not able to monitor A2P SMS traffic coming into their networks or to identify its source, and which therefore allow all A2P SMS traffic to terminate on their networks, are known as open networks.

Closed or protected networks are those MNOs that have blocked all A2P SMS traffic coming into their networks apart from that coming from companies with which the MNO has negotiated a termination agreement. These MNOs have typically deployed platforms that can monitor and block A2P SMS traffic as needed.

Protecting networks can sometimes be achieved via commercial means; for example, by signing AA19 or AA63 agreements with all MNOs. However, the process of doing so can be very difficult.

The challenge for MNOs is that they need to ensure that their networks remain open for P2P SMS traffic, while at the same time securing them for the termination of legitimate A2P SMS traffic.

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It is important that MNOs are vigilant in maintaining and managing their SMS firewalls to ensure that their networks are properly protected and remain closed to unauthorized traffic. Fraudsters and low-cost aggregators will persistently seek to compromise MNO networks in order to gain access.

The existence of open and closed networks varies between markets. There are some countries in which all of the MNOs have closed their networks to unauthorized traffic, others in which there is a mixture of closed and open networks, and yet others in which all networks remain completely open. There are also instances where an MNO has deployed an SMS firewall but may not necessarily be managing it appropriately on an ongoing basis. This will result in a network that becomes open even though the MNO might regard it as closed.

Revenue assurance platforms and SMS firewalls play key strategic roleTo help address the problem of SMS spam and revenue leakage on mobile operator networks, some infrastructure vendors are offering platforms that attach to the MNO’s SMSC; others provide platforms that are transparent to the SMSC. Both types of platforms perform a number of different but related functions, and comprise a number of modules, including SMS Router, SMS Firewall, A2P SMS Gateway or A2P SMSC, and reporting and billing server.

A fundamental element of an SMS revenue assurance platform is the SMS router, and in particular the home routing capability of the SMS router. Home routing enables a terminating MNO to intercept and control all inbound P2P or A2P SMS

arriving from an international source before its delivery to the mobile subscriber. The SMS router can then process the SMS according to SMS header data such as the source address and Global Title, and trigger control applications as appropriate, such as the SMS firewall.

The SMS firewall is a key filtering element of the revenue assurance platform because it enables the dynamic detection of grey routes and SIM farms. Using the SMS firewall, the revenue assurance platform can filter inbound messages to detect A2P SMS that is using black or grey routes. There is also the added benefit that the SMS firewall can detect spam, IRSF call-to-action, Wangiri, or malware fraud. An effective SMS firewall will block and/or quarantine these messages in real time.

An effective SMS firewall will also identify the details of the grey route, including the originator of the SMS – for example, a bank, enterprise, or website. All of the grey-route message information can then be collated into a report, which can be used by the MNO to develop monetization strategies. These monetization strategies might include:• EstablishinganAA19/AA63SMS

interworking agreement with the originating or transit MNO.

•Commercializingtheterminationof A2P SMS with the P2P SMS hub provider/s that are identified as part of the grey route.

• EstablishingawholesaleA2Pconnectivity service with a single SMS aggregator using the A2P SMS gateway or SMSC module (the MNO may already have an A2P SMS gateway/SMSC and, consequently, infrastructure for terminating and billing A2P SMS).

This aggregator would then act as a “super aggregator.”

•CreatingawholesaleA2Pconnectivity platform and negotiating connectivity agreements with multiple SMS aggregators, which would use the platform to deliver A2P SMS to the MNO’s subscribers.

However, it must be noted that these strategies on their own will not result in maximum monetization, because those companies using grey routes typically employ least-cost routing to find new routes as and when existing routes are closed. Successful use cases of A2P SMS revenue growth are all underpinned by a platform with the ability to block A2P SMS grey routes and operated under an ongoing managed service to ensure that all tactics, routes, and methods are maintained and current.

If a message is not spam, but is identified as coming from a source that the MNO does not recognize or from a source route that is not paying the MNO for the SMS termination, the revenue assurance platform provides the MNO with the information it needs to contact the sending party and negotiate a termination agreement. This termination agreement will allow the MNO to bill for SMS termination, ensuring continued delivery of traffic onto its network for the aggregator and/or enterprise.

The MNO’s billing module should cater for all A2P SMS monetization strategies, including bill generation, dispute handling, diverse pricing plans, and detailed client reports. The MNO will need to check that it does not already have a special contract in place for a particular company, one that binds the MNO to a certain price, before setting a wholesale price that is consistent

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with its approach to the rest of its A2P SMS customers.

There are a number of good reasons why MNOs might wish to deploy revenue assurance platforms and SMS firewalls:• Thedesiretomonitorandcontrol

A2P SMS traffic terminated on their networks in order to protect the interests of their consumer and enterprise customers, as well as their own networks.

• TheeliminationofSMSspamandfraud.

• ThedeclineinP2PSMStrafficandrevenues, which is leading MNOs to seek new revenue streams from their SMS infrastructure investment in terms of equipment and capacity license and ongoing maintenance charges.

•Growinginterestfromtheenterprise market in the use of A2P SMS owing to its low price, high reliability, and high level of customer engagement.

• Thedesireonthepartofenterprises to have all of their traffic delivered within a particular country, to maintain data privacy.

• Increasingawarenessoftheadvantages of SMS revenue assurance platforms and firewalls at group level; for example, Digicel has recently initiated a deployment and Vodafone is reportedly considering doing so.

• AstableandestablishedA2PSMS market, where networks are closed to the effects of spam and least-cost-routing, which “clean” the SMS channel for enterprises and helps to increase price points, justified by offering a higher-quality delivery channel.

• Guaranteedrecurringmonthlyrevenues from new aggregation agreements.

• Returnoninvestmentistypicallymeasured in months, and profit

margins can be significant, given that the operator has already invested in the SMS infrastructure and billing platforms.

• SomevendorsarehappytosupplyMNOs with a turnkey solution (inclusive of a managed service) on a revenue-share basis, further reducing capex and opex for the MNO.

False positives and acknowledgments are a big negativeA MNO must choose an SMS firewall or filtering vendor that understands not only the technology but also the ecosystem. This will ensure that monetization is achieved without negatively impacting the demand on that particular MNO. Many vendors misconfigure their firewalls and deploy them without much thought, leading to a negative and sometimes long-lasting effect on the ecosystem.

When MNOs first install revenue assurance platforms, the platform’s SMS firewall is typically set to block all incoming messaging traffic for which the operator does not recognize the source as being an aggregator or enterprise with which it currently has a termination agreement. Consequently, the platform will block even legitimate traffic from an enterprise that has engaged with an aggregator for the delivery of bulk SMS. It may also block traffic from a genuinely chatty user, in a scenario known as a false positive.

An SMS firewall can also be set to send false acknowledgments that imply that a message has been delivered when it has not. In this scenario, interconnection charges are also still incurred.

False positives and false acknowledgments are regarded in

the industry as bad practice. They are extremely disruptive to the businesses of all parties in the value chain, resulting in a poor experience for the end consumer or enterprise user, and leading the value chain as a whole to believe that SMS is unreliable.

MNOs will likely spend approximately six months initially fine-tuning their SMS revenue assurance platform deployments, with part of the process being the renegotiation of termination agreements. However, they will need to continually monitor their SMS firewalls to maintain their effectiveness and to ensure that false positives and false acknowledgments are kept to a minimum, given that they can occur at any time.

The risk of false positives may be one inhibitor for those MNOs considering deploying an SMS revenue assurance platform and SMS firewall. Others include: • Alackofawarenessofthe

incidence of SMS spam and SMS revenue leakage on their networks, mostly because A2P SMS traffic tends to be “disguised” as P2P SMS; some MNOs do not view A2P SMS as a tangible product. Many MNOs consequently do not believe that they suffer SMS spam/revenue leakage.

• ViewingSMSasalegacytechnology; many are seeing their P2P SMS traffic and revenues decline and have consequently not considered reusing the investment in their legacy messaging infrastructure.

•Concernsthattheirmobilesubscribers will churn to other networks if legitimate traffic such as alerts from social networks is inadvertently blocked.

• ThefactthatSMSrevenueassurance platforms and SMS

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firewalls will require ongoing monitoring and updates to maintain their effectiveness; MNOs may not have the available resources to dedicate to this activity.

• Theneedtomakesurethattheirnetworks are completely closed – “half-filtering” will result in a distorted pricing structure and lead to uncertainty, confusion, and a poor experience in the market. MNOs need to ensure that they implement platforms that can block all grey routes, including SIM farms.

Closed networks deliver quick ROI and high profitsOnce the revenue assurance platform is successfully deployed and new termination agreements are in place, MNOs are in a position to generate and grow meaningful, recurring A2P SMS traffic and income on a monthly basis.

That potential is heightened when all of the operators in a domestic market close their networks. Doing so creates a stable market in which there is a wholesale price, a distribution channel, and an established retail price. In this scenario, which already exists in a number of markets, enterprises are more trusting of and willing to use A2P SMS, resulting in increased A2P SMS revenues and the development of an ecosystem that will support continued growth.

Profits can be extremely high, because MNOs are simply starting to bill for A2P SMS traffic that they are already carrying on their networks, with minimal upfront investment. In addition, some vendors are able to provide their platforms as part of a managed service, for which they would take a share of revenues. This further

reduces the upfront and ongoing costs for the MNO.

The process of implementing an effective revenue assurance platform, delivered as a managed service, includes the following steps: • DeploytheA2PSMSfirewallwithin

the MNO network.• Applyasetofrulestodetectand

block grey traffic.• Signagreementswithaggregators

to facilitate the transit of billable A2P SMS traffic.

• PerformanauditofallSMSaccesspoints on the MNO network and resolve any breaches.

• Setawholesaleratebasedoneconomic and market factors.

• Setadateforwhentheincreasedprice and blocking will take effect.

• Ensureactiveongoingmanagementto safeguard optimum long-term recurring revenues.

The new price has to be rightMNOs should carefully consider the extent to which they can increase A2P SMS termination rates once they have closed their networks, for a number of reasons. For example, “bill shock” may discourage enterprise customers from using A2P SMS as a transactional or promotional channel, causing them to use A2P SMS less or, in the worst case scenario, to discontinue their use of A2P SMS in favor of a cheaper channel.

Should MNOs within a domestic market charge high A2P SMS prices or increase their A2P SMS prices in a way that is regarded as anticompetitive, local competition authorities or industry regulators may step in, which could result in the relevant body setting A2P SMS prices, rather than the MNOs. For example, in June 2014 an Australian Competition and Consumer Commission inquiry determined

that it should regulate the access to and pricing of SMS termination – including A2P SMS – in order to increase competition both in the wholesale market and also in the relevant downstream markets (retail, SMS aggregation). The determination was in response to its domestic mobile terminating access service declaration inquiry, which found that Australian MNOs have a monopoly over voice and SMS termination services. A number of other markets have also regulated pricing for SMS termination; these include China, India, Indonesia, New Zealand, Pakistan, Colombia, and Bahrain.

In order to determine to what extent A2P SMS pricing elasticity exists – that is, the extent to which A2P SMS traffic would increase or decrease respective to the decrease or increase in A2P SMS pricing – Ovum’s recent survey canvassing enterprises on their use of A2P SMS asked respondents to indicate how much less or how much more A2P SMS traffic they would send if the price of an SMS increased beyond the current industry average of $0.03 per message.

As Figure 7 shows, approximately half of the respondents indicated that they would send between two times and four times less traffic if the per-message price increased to $0.04 or $0.05.

Of these, 17.2% of respondents said that they would send four times less traffic if the price was $0.05 and 14.1% said they would send four times less traffic if the price was $0.04.

The survey also found that 43.7% of respondents said they would send between two times and four times more traffic if there was a fixed price for unlimited SMS. In addition, 33.9% said they would send between two

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times and four times more traffic if the price was $0.01, and 15.7% said they would send between two times and four times more traffic if the price was $0.02. Furthermore, 10.9% of respondents said that they would send four times as much traffic if there was a fixed price option for unlimited SMS, and 1.6% said they would send four times as much traffic if the price was $0.01.

Ovum believes that the survey results indicate a significantly high level of pricing elasticity, which would bear consideration when MNOs are structuring their pricing strategies for A2P SMS. This is especially the case for those operators that may be deliberating the extent to which closing their networks represents a revenue opportunity above and beyond simply

reducing or eliminating revenue leakage.

Revenue assurance, not reduction By using revenue assurance platforms to identify all SMS traffic terminating on their networks, MNOs have been able to retrieve revenues for terminating SMS traffic of which they may previously not have had visibility.

0

10

20

30

40

50

60

70

4x more3x more2x moreNo change2x less3x less4x less

Res

pond

ents

(%)

How much more/less monthly SMS traffic would you send if the unit price was higher (e.g., $0.05)?How much more/less monthly SMS traffic would you send if the unit price was higher (e.g., $0.04)?How much more/less monthly SMS traffic would you send if the price was lower (e.g., $0.02)?How much more/less monthly SMS traffic would you send if it was even lower (e.g., $0.01)?And how much more/less monthly SMS traffic would you send if you had an unlimited SMS fixed-price option?

Figure 7: How much more/less monthly SMS would you send if the price was higher/lower than $0.03?

Source: Ovum

Figure 8: Global mobile operator SMS revenue assurance platform deployments, September 2014

Operator Region/country

Subscribers (millions)

Deployment Results – messaging traffic Results – messaging revenue

Not disclosed Europe 8.0 January 2014 1 million SMS per month in January 2014; 2.5 million SMS per month in May 2014

e60,000 per month in January 2014; e150,000 per month in May 2014

Not disclosed Africa 9.0 February 2014 1 million SMS per month in February 2014; 6 million SMS per month in May 2014

e50,000 per month in February 2014; e200,000 per month in May 2014

O2 Ireland Ireland 1.5 Not disclosed Not disclosed e183,000 per month in 2013

SmarTone Hong Kong 1.8 December 2013 Not disclosed Not disclosed

Telenor Norway 3.4 April 2007 1.9 SMS per subscriber in 2007; average of 13.1 SMS per subscriber in 1Q14; increase of 22% year-on-year in 2013

$81m since 2007; ARPU increased from $0.10 to $0.50

Not disclosed Europe 10.0 February 2014 Not disclosed SMS price increased from e0.005 to e0.042; revenue uplift of e12m per year based on 5 SMS per month

Not disclosed Asia 1.6 Not known Not disclosed SMS price increased from e0.016 to e0.036; revenue uplift of e2m per year

Not disclosed Middle East 0.5 Not known Not disclosed SMS price increased from e0.003 to e0.008; revenue uplift of e150,000 per year

Not disclosed Africa 20.0 Not known Not disclosed SMS price increased from e0.002 to e0.016; revenue uplift of e17m per year

Wind Hellas Greece 4.5 November 2014 Not disclosed Not disclosed

Note: SMS traffic and revenues refer to third-party A2P MT SMS Source: Ovum

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They have been able to do so by negotiating commercial agreements with a smaller number of approved tier-1 aggregators, mandating that all terminating traffic onto their networks comes through these companies, and blocking all other aggregators – by closing their networks, essentially.

Norwegian operator Telenor, for example, has generated $81m in revenues since it deployed an SMS revenue assurance platform in 2007, with the number of A2P SMSs per subscriber per month increasing from 1.9 in 2007 to 13.1 in 1Q14, including a 22% increase year-on-year in 2013. Telenor’s A2P SMS monthly ARPU has also increased, from $0.10 in 2007 to $0.50 in 1Q14.

Taking this approach allows MNOs to charge for SMS message termination. It also means that they are in a position to slightly increase their prices without losing customers, because they can provide a higher quality of service to their aggregator/enterprise customers. Enterprises in certain industry verticals would be happy to pay more for this.

MNOs may not be able to raise prices substantially in markets where there is a mixture of open and closed networks. This is because they have to stay competitive with other MNOs and remain an attractive supplier for aggregators.

Affordability Index: calculating the A2P SMS pricing sweet spotEven in markets where all networks are closed and MNOs have more control over pricing, they will need to be careful about the extent to which they increase SMS termination charges. They need to avoid discouraging potential enterprise customers from using A2P SMS

altogether and also to ensure that they can maximize their revenues.

To assist MNOs with their A2P SMS pricing decisions, Ovum has worked with Mblox and Anam to develop an Affordability Index for A2P SMS prices. This uses the theory of elasticity to calculate the price at which revenue is maximized, which occurs when demand becomes unit-elastic.

The theory of elasticity holds that when demand is elastic, a fall in price will increase traffic volumes in such a way that revenues will also increase. Conversely, when demand is inelastic, a fall in price will not change traffic volumes sufficiently to compensate for the price reduction, which means that revenues will decline. Effectively this means that while demand remains elastic, revenues will keep rising to their maximum point, but as demand becomes inelastic, revenues will start to fall.

Mblox has identified that a key challenge for MNOs is to be able to

calculate their “sweet spot” in A2P SMS pricing – the price at which an MNO would generate the maximum revenues, beyond which an increase in price would discourage enterprise use of messaging and cause a decline in A2P SMS traffic and revenues. It is also, conversely, the number beyond which a fall in price would not increase traffic volumes to the extent needed to maintain or increase revenues.

Some enterprise customers, such as banks, may be willing and able to pay a higher price for A2P SMS, in order to ensure reliable message delivery, especially for transactions or services such as two-factor authentication. However, brands wishing to use A2P SMS for a marketing campaign may well be discouraged if the price of an A2P SMS rises beyond what they feel is reasonable.

It is also important that MNOs not charge too low a price for A2P SMS, because that will likely lead to an increase in spam.

Figure 9: Affordability Index

Source: Ovum

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The Affordability Index will allow MNOs to calculate the impact on their revenues of increasing or reducing their prices for A2P SMS termination. It includes scenarios in which an MNO can assess whether an increase or a reduction in their A2P SMS price would result in reduced, rather than increased, revenues. The Index will show at what price demand is elastic within a particular market, which means the MNO can model the extent to which they can increase or reduce their A2P SMS price in order to maximize their A2P SMS revenues.

Belgian MNOs could more than double revenues by lowering their A2P SMS price In Belgium, where most of the MNOs have closed their networks, the Affordability Index calculates that the optimal price for an A2P SMS is €0.0262 (circa $0.0296). However, the average A2P SMS price in Belgium is approximately €0.0456 ($0.0515), which is much higher than the optimal price, and also higher than the global industry average of approximately $0.03. The Affordability Index calculates that at this price, an MNO that is terminating 25 million A2P SMSs per month would generate €1.14m in monthly revenues.

The Index also shows that if a Belgian MNO that is currently charging €0.0456 per A2P SMS were to reduce its price by 25% to €0.0342 it would experience an increase in A2P SMS revenues of approximately 107% and an increase in A2P SMS traffic of 172%. If the MNO were to reduce its price by 50%, to €0.0206, it would experience even higher growth in revenues and traffic (127% and 354% respectively).

Conversely, if the Belgian MNO were to increase its average A2P

SMS price in the range of 10–50%, the Index calculates that it would experience a significant decline in its revenues. At a 50% hike in price, revenues would reduce almost to zero due to a significant fall in traffic volumes.

MNOs in India will increase revenues by increasing A2P SMS pricesIn India, which is regarded as a closed market, the Affordability Index calculates that the optimal A2P SMS price is INR0.52 ($0.009), but the average price is INR0.086. According to the Index, an Indian MNO terminating 500 million messages at INR0.086 would generate revenues of INR43m. The MNO would experience a 42.7% rise in revenues and a 4.9% decline in traffic if it were to increase its A2P SMS price by 50%, that is, to INR0.129. At this point the average price is still below the optimal price, meaning demand would remain inelastic, and MNOs would be able to increase their prices and expect their revenues to continue to increase up to the point that the optimal price is reached.

On the other hand, if an Indian MNO were to increase its A2P SMS price to 50% above the optimal A2P SMS price, the Index calculates that it would experience a decline in revenues of 27%, with traffic also dropping by 51%.

SummaryEnterprise use of SMS as a communications channel is growing, and the value chain itself is becoming of increasing interest, or concern, to MNOs, for multiple reasons.

For some time, certain companies within the value chain have been

unlawfully using A2P SMS, resulting in a negative user experience for the end user, whether that is a consumer or an enterprise. As an extension of this, more MNOs are becoming aware that they do not have complete visibility of messaging traffic terminating on their networks.

SIM farms in particular, whether legal or illegal, present a significant problem for MNOs because their mode of operation typically means that MNOs are not being appropriately recompensed for A2P SMS termination.

Some MNOs have already moved to address the problems that grey routes and SIM farms create, deploying SMS revenue assurance platforms inclusive of an SMS firewall module. In so doing, MNOs are identifying SIM farms, aggregators, and enterprises that were not previously paying them to terminate traffic on their network. They are negotiating termination agreements with these companies, and have been able to retrieve those SMS revenues. For example, MNOs such as Telenor and O2 Ireland are already recovering meaningful revenues from having deployed SMS revenue assurance platforms. In addition, MNOs are finding that there is a relatively quick return (typically within six months) on their investment in SMS revenue assurance platforms, with relatively minimal outlay in terms of capital and operating expenditure.

There are concerns that MNOs could use SMS revenue assurance platforms to increase A2P SMS termination rates to the point where enterprises would avoid using SMS altogether. For example, approximately half of the enterprise respondents to an independent

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survey conducted by Ovum indicated that they would send between two times and four times less traffic if the per-message price increased from the industry average of $0.03 to $0.04 or $0.05.

Ovum believes that the results indicate a high enough level of pricing elasticity that MNOs should take it into account when they are structuring their pricing for A2P SMS. This is particularly true for those operators that may consider closing their networks to be a revenue opportunity beyond that of reducing or eliminating SMS revenue leakage.

The Affordability Index that Ovum has developed in conjunction with Mblox and Anam will help MNOs

to determine the optimal A2P SMS price for their market. This will help them to maximize revenues, and also to model the impact on their revenues of increasing or reducing their A2P SMS price. For example, the Index shows how MNOs in Belgium and India will be able to increase their revenues by varying their prices up or down according to their market. Indeed, there is the possibility that Belgian MNOs will be able to double their revenues by reducing their A2P SMS price.

AppendixMethodologyFor this white paper, Ovum conducted primary research over the course of a number of months. This research comprised phone and face-to-face

interviews with companies including Mblox, Anam, infrastructure vendors, SMS aggregators, and telecoms hubs.

Ovum conducted an independent online survey between October 15 and November 21, 2014. The sample included enterprises based in all seven regions globally. Respondents were drawn from business/professional services providers; device vendors; manufacturing, financial services, media, and Internet companies; the public sector; and app providers/OTTs.

In conjunction with Mblox and Anam, Ovum has also developed an Affordability Index for A2P SMS pricing, from which content was drawn for this white paper.

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ABOUT OVUMOvum is a leading global technology research and advisory firm. Through its 180 analysts worldwide it offers expert analysis and strategic insight across the IT, telecoms, and media industries. Founded in 1985, Ovum has one of the most experienced analyst teams in the industry and is a respected source of guidance for technology business leaders, CIOs, vendors, service providers, and regulators looking for comprehensive, accurate and insightful market data, research and consulting. With 23 offices across six continents, Ovum offers a truly global perspective on technology and media markets and provides thousands of clients with insight including workflow tools, forecasts, surveys, market assessments, technology audits and opinion. In 2012, Ovum was jointly named Global Analyst Firm of the Year by the IIAR.

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