Mobile operators are key to unlocking the revenue potential of A2P SMS messaging; but the problem of lost revenue from using gray routes continues to ruin much of the industry. There are two main reasons. Explains Gavin Patterson, Chief Data Analyst of Mobilesquared.
First, SMS messages delivered over gray routes exploit loopholes in the GSM mobile framework, driving SMS termination charges (where the mobile operator collects revenue) sideways. This means that enterprise A2P SMS messages can be offered at a lower market value, denying mobile operators and Tier 1 messaging aggregators revenue.
Second, message delivery quality is extremely poor because SMS messages are routed through often unregulated and poorly constructed mobile operator networks in remote corners of the globe. For example, while a business might be attracted by the low prices offered, it's likely that some of the messages they purchase will arrive late, if at all. For notification, marketing, or customer service functions that increasingly rely on business SMS, this is a major weakness.
Research conducted by Mobilesquared; revealed that revenue loss and fraud prevention have become the key driver for mobile operators implementing SMS firewalls.
By the end of 2017, mobile operators' 48% had effectively "locked down" their network by investing in a next-generation SMS firewall capable of identifying white-route traffic and blocking gray-route traffic. We believe that by 2022, mobile operators' 82% will have invested in a next-generation SMS firewall.
"Traffic SMS White route A2P accounted for 52.3% of total A2P messaging traffic in 2017 and is expected to increase to 85% of total traffic by 2022, as mobile operators invest in next-generation SMS revenue assurance platforms to capitalize on the A2P SMS messaging opportunity.”
Lost revenue
Nonetheless, this means a lot of unmonetized gray route traffic is flowing through, and in the short term, gray route traffic is clearly negatively impacting potential A2P SMS revenue. We estimate that if all gray route messages were to be instantly converted to white route traffic starting in 2017, this would potentially generate cumulative additional global A2P SMS revenue of $36.52 billion by the end of 2022.
Although the impact of revenue losses on the A2P SMS messaging industry will diminish over the forecast period, as mobile operators deploy next-generation SMS firewalls, gray-route traffic can be converted into white-route revenue earlier.
However, the impact of the shift from gray to white market revenue on the overall value chain is immense. Mobile operators control the majority of messaging revenue, and their grip would tighten as more and more networks are blocked, putting increasing pressure on aggregators active in the gray market.
Not only would aggregators' market share decline, but their actual revenue would also decline, encouraging further market consolidation. This is because, although gray route messages are charged at a fraction of the cost of white routes, there is significant gray route volume that is entirely attributable to aggregators.
With the transition from the gray to the white route; aggregators would only be able to operate at the margins between the authorized wholesale and termination rates charged by mobile operators, increasing the pressure on their side of the supply chain.
Fraud prevention, growing trust
While the focus on revenue loss is obviously central to mobile operators, fraud prevention and the tacit trust this creates in the network is of equal, if not greater, importance.
As more mobile operator networks are blocked and the number of grey routes is reduced, companies looking to exploit commercial loopholes will continue to probe networks for new grey route opportunities.
Meanwhile, other companies will explore more fraudulent activities, such as SMS interception, which attacks the SS7 signaling network and exposes mobile customers to phishing activities by making security messages vulnerable to interception.
Mobilesquared estimates that two-factor authentication SMS traffic accounted for 18% of total annual traffic in 2017.
“That’s nearly 300 billion messages that could have potentially been intercepted and exploited by a rogue company.”
While mobile operators risk their brand reputation, loss of customer trust, increased churn, and reduced revenue from such attacks, an SS7 firewall that monitors signaling traffic in real time is a tough inside sell.
While SMS firewalls prevent fraudulent network activity and provide a direct return on investment from A2P SMS termination revenue, an SS7 firewall only protects A2P SMS revenue while protecting existing traffic.
