‘Origin-based pricing’ is a term most associated with the voice industry. But increasingly, it also describes a growing practice in the messaging business. Mobile operators (MNOs) have begun to demand that aggregators separate domestic and international traffic. Why? So they can apply higher prices for international A2P SMS.
For a long time, most MNOs sold A2P SMS at one fixed price per SMS. This kept things simple for operators and aggregators alike. In other cases, operators would use volume-based priced bands. The aim? To incentivise aggregators to grow traffic volumes in exchange for progressive discounts.
Either way, MNOs would define these rates regardless of where the A2P traffic originated. It’s been a stable model. While the limits of volume bands and their corresponding prices have changed occasionally, the model has stayed pretty much the same.
But more recently, some operators have introduced origin-based pricing: charging more when the traffic comes from abroad. Although it’s not easy to trace exactly when or where this new model first appeared, it’s clearly catching on. Examples are emerging from operators in Africa, Asia, Europe and Latin America: implementing origin-based pricing with a higher rate for international traffic.
Operators under pressure
Why are they doing this? Well, there’s been a squeeze on MNO messaging income from many directions. P2P revenues fell when consumers switched to OTT messaging apps. Then, when the pandemic hit, roaming revenues slumped too. In response, senior leaders have pressured their A2P teams to drum up additional income.
Since A2P SMS had been growing steadily for years, with little sign of letting up, it was an easy target for a price hike. Hence the experiments in origin-based pricing. The sums speak for themselves. In Pakistan, for example, a text from a local company might cost $0.01 but $0.10 if sent from London. A 10x difference.
However, while A2P SMS is a valued channel with universal reach, there are limits to price elasticity and customer demand. When enterprises believe they are being pushed too far, they will find ways to send SMS for less. They might explore grey routes, alternative messaging/authentication solutions (WhatsApp, Flash Calls, email) or even lobby local regulators to intervene.
The latter is what happened in Colombia. Here, banks lobbied the government about, what they considered, excessive prices for A2P SMS (though not origin-based). The regulator responded by slashing fees to virtually zero. As a consequence, the Colombian A2P market value has been nearly wiped out. The regulated operator rate is so low that even grey routes don’t see value in competing.
In Europe, there was a minor skirmish between the EU and Arcep, the French regulator, over origin-based pricing for voice calls. Eventually, it became clear that the EU had no jurisdiction to block origin pricing for non-EU A2P SMS traffic. Freed from this regulatory risk, a large cohort of MNOs in Europe started to support it.
A2P SMS pricing at 20x the normal rate?
For many in the industry, the fundamental idea of origin-based pricing was – and is – illogical. They argue that the practice goes against rational economic principles. Not least because of the numbers involved: in some cases origin pricing can scale up to 20x more than the regular price.
Nevertheless, the policy is now quite widespread. From our observations, it appears that origin pricing is a bigger issue in developing markets – South Africa, India, LATAM – where a significant portion of A2P SMS traffic for authentication arrives via international routes.
Yet even here there is still some confusion over how to decide whether traffic is international or not. Does it depend on the location of the enterprise and/or messaging provider headquarters? Or the route by which the messages arrive at their destination? Does the language of the message content play a role?
High prices force some A2P providers down the grey route
Whatever, we’re always left with the same question: how do messaging providers in these regions deal with the price hikes?
Sometimes they absorb the rise. They might do this by increasing fees for some customers while subsidising the impact for strategic customers in order to maintain their existing price structure.
Others will blend their routes or even migrate more of their traffic to grey SMS channels. Obviously, grey routing is a controversial topic, but a commercial reality. Still, the long-term effect of more grey traffic will inevitably risk downgrading quality, transparency and trust in A2P SMS.
OTT, flash calls, apps – enterprises consider alternatives to origin-based SMS traffic
Where messaging providers choose to pass on the increasing costs of A2P messaging, it’s natural that enterprises turn to alternative solutions.
One is flash calling (which we have written about before here).
Flash calling appeals because it’s cheap. There’s virtually zero risk of interception by fraudsters. And for users, much of the friction involved in authentication disappears, with no need to exit an application, open the messaging session, make a note of the one-time passcode, return to the app and then type it in. This friction-free authentication is also available for SMS but, like flash calls, only on Android devices limiting its reach as a commercial service.
Besides flash calling, the most obvious option is to send OTPs by messaging app (WhatsApp, Telegram etc). The viability of this approach will depend, of course, on the penetration of the channel in the targeted country and the financials involved.
And then there is app-based authentication. For example, a bank might ask customers to open up its native app and tick a box to sign in. Google might do the same inside Gmail or YouTube. Code-generating authenticator apps are also being offered as a means to reduce reliance on SMS.
An even-handed approach to an A2P industry dilemma
Origin-based pricing is certainly a delicate topic, which we recognise at Global Telco Consult (GTC). On the one hand, we understand MNOs are fending off competitors on multiple fronts and looking for ways to sustain their income. On the other is an A2P ecosystem that wants to bring enterprises into the business messaging space with competitive, relatively consistent and transparent fees.
All changes provoke a reaction so we believe operators should be mindful of the consequences as they experiment with sudden changes in pricing. From an aggregator perspective, an operator u-turn is unlikely. Therefore if origin-based pricing is here to stay, perhaps it’s best to focus discussions on how much more enterprises are willing to pay before they seek out other channels. This approach should bring more constructive adjustments in the short term.
We’re here to help
At GTC, we have a neutral view of origin-based SMS pricing. We want to bring insight into the issue so that we can help MNOs and aggregators work through the challenges it presents.
Please get in touch.
Global Telco Consult (GTC) is a trusted independent business messaging consultancy with deep domain knowledge in application-to-person (A2P) services. GTC provides tailor-made messaging strategies to enterprises, messaging service providers, operators and voice carriers. We have expertise in multiple messaging channels such as RCS, Viber, WhatsApp, Telegram and SMS for the wholesale and retail industry.
GTC supports its customers from market strategy through service launch, running the operations and supporting sales and procurement. The company started in 2016 with a mission to guide operators and telcos to embrace new and exciting opportunities and make the most out of business messaging. For more information or industry insights, browse through our blog page or follow us on LinkedIn.