SMS: Nvst B4 It's 2 L8

I’ve written quite a lot in the past about the battle between Microsoft and Google. That battle, however, is actually an outgrowth of another more fundamental tension in the information technology, or IT, world.

I’m speaking of the open source versus proprietary operating system (OS) argument. This argument has suddenly become even more important as we watch another computer era come to an end.

Specifically, the laptop, which has destroyed the desktop, is being destroyed in turn by mobile devices – both tablet computers and phones. One critically important consequence of this creative destruction is the replacement of e-mail addresses by phone numbers. SMS texting is already much larger in terms of volume than e-mail. Soon, text will surpass e-mail in utility. Then it will displace old style e-mail once and for all.

There’s a lot that I need you to understand about this battle, now that various winners have emerged in the mobile space. Not only will this battle restart the software race, it will also create huge winners in a whole range of mobile arenas, from back-end services to component manufacturers and application companies.

There will also be huge losers as the next wave of creative destruction rips through IT like a storm-force gale.

Essentially, Short Message Service (SMS) technology grew out of the 27-year old technology used to transmit short text messages to radio devices like pagers and handsets. SMS uses an underutilized and very small portion of the signaling protocol used to control standard telephone traffic. In the early 1980s, this was identified as a desirable goal, in large part, because it would allow emergency communications when normal voice capabilities were not fully functioning. The actual SMS application was developed in 1984 through a joint French and German effort, specifically by Bernard Ghillebaert and Friedhelm Hillebrand.

The genius of this innovation was that text messages could be fit into the existing signaling formats, exploiting unused bandwidth at no additional cost. The nature of this “hack,” however, meant that texts were extremely limited in size. All that was required to implement the SMS technology was that existing mobile devices upgrade their software to recognize and display SMS text data. From that point forward, however, SMS messaging capabilities have been built into all mobile devices and networks.

What was also needed was a new network service to route SMS text messages, SMS service centers. With all the pieces in place, SMS texting was possible but little used. For over two decades, it was a largely dormant capability. At some point, however, teenagers found out about it. Now it’s the most widely used data application in history.

Text is, without question, the killer app of our time. On the surface, SMS appears to be a simple, even primitive technology. For that reason, I suspect, the big players like Google and Microsoft basically underestimated its potential and ignored it. This, they will learn, was a huge mistake.

There’s something about being an enormously successful disruptive technology company that seems to blind these organizations to the simplest and most obvious threats to their hegemonies. The big players were looking for some new whizbang science-fiction technology to appear so they could buy it up and control it.

As a result, SMS – a technologically simple phone-to-radio protocol – now threatens to topple the giants sitting atop the IT bean stock. Granted, it is new technological advances that make SMS so useful today. Still, the very simplicity of SMS text makes it such a massively disruptive technology. How disruptive?

There are over 4.2 billion SMS texters, accounting for more than 60% of the planet’s population. Fewer than half as many people have Internet access. Last year, the SMS industry grew almost 25% and some analysts are predicting the industry will quintuple in size. Already, however, it has displaced e-mail as the network’s killer app.

In terms of sheer volume, SMS is unparalleled. Internet traffic is barely a third the size of SMS. Fee-based SMS news services already surpass daily newspaper subscriptions. Internationally, banking services are moving rapidly to the SMS platform. Sweden and Norway now have fully functional SMS banking services. Other places, like Estonia, are replacing coin- and bill-operated machines with SMS-based services.

Want to pay for a cup of coffee, a parking place or groceries? You send a text instead of inserting a coin or handing over cash or a credit card. With Bluetooth enabled, it’s even easier. And this is just the beginning. The potential applications for SMS technology are vast. We’re at the same point with SMS that we were at with the Internet when most people saw the Web as an amusing, but unimportant diversion. A few people saw otherwise, including Google’s Larry Page and Sergey Brin. Others didn’t catch on until it was too late to carve out an important part of the business. This includes people as smart as Bill Gates, by the way.

Behind the scenes, the developers who understand what’s happening are duplicating the frenetic race for success that I saw in Silicon Valley in the early days of the Internet. It is incredibly exhilarating. This industry is going to be an important driver in the creation of new jobs.

Another reason that people missed the importance of SMS text is that it was sort of assumed that something shinier would come along and replace SMS. Once everybody got their smart Web-enabled phones, it was just understood, SMS text would fade away.

That’s not going to happen, for several reasons. One is that we need backward compatibility. Younger users tend to have “feature” phones without Web access, so we have to have a single protocol that everybody can use. More importantly, however, mobile devices put great premium on battery life and weight. SMS is efficient. It radically reduces power demands. This allows smaller chips and longer battery life, which is critical with tablet computers and mobile phones. There is, in fact, going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android OS has basically won the technological battle of the bands. It will become the standard.

Microsoft has been beaten in the mobile space and their proprietary OS is fading fast. Nokia has made a series of blunders as well and is now losing the mobile OS space it once seemed destined to own forever. For investors in transformational technologies, this is extraordinarily great news. The opportunities are enormous…and they are unfolding at this very moment.


Patrick Cox,
for The Daily Reckoning