The first SMS-capable mobile phones were approved for sale in Europe 20 years ago this month. By any measure, text messages have become a huge success, at least for the telephone companies, with more than 6 trillion text messages sent worldwide in 2010, generating more than £69 billion ($110 billion) in revenue. But the future may not be anywhere near as bright because of increasing use of "free" Internet-based services such as Facebook, Apple's iMessage and WhatsApp.com.

Text messages are a great deal for telephone companies. It costs almost nothing to transport an text message, yet the global average price for a message is 11 cents. Verizon lists its price as 40 cents (20 cents for you to send a message and 20 cents for your friend to receive the same message). And this is essentially pure profit. A great deal for the telephone carriers and an example of the lack of real competition, since real competition would drive the price of a service that costs almost nothing to provide very low indeed.

Facebook replacing texts as communication tool

It is not quite as exploitive as it might appear since 60 percent or so of US wireless customers now have flat rate, and frequently unlimited, text packages as part of their wireless contracts rather than paying per message. Some carriers, such as Verizon, have been limiting their low-cost and limited SMS service offerings, thus raising the basic revenue they can expect from the average customer.

But the relentless march of technology is beginning to impact this stream of money. More and more smartphone owners are using social media sites such as Facebook to communicate with their friends instead of text messages. Some are doing so to save money since there is no per-message charge for updating your Facebook page. But most are likely making the switch because they already use Facebook as their primary way to let their friends know what is going on.

There is a new class of application directed at people who actually do want to save money. WhatsApp  and, separately, Apple's iMessage are examples. They also demonstrate the advantages and limitations of this approach. The biggest advantage is that they ride on top of the smartphone Internet data service and are not charged on a per-message basis. The biggest limitation is that the vendors have not yet adopted a common standard, so you can only send messages to people who have the same application.

Will text message fees eventually die out?

It is fundamentally irrational to have a per-message charge for an Internet-based service - very advantageous for a carrier that could get away with it, but technically irrational in a network such as the Internet where the incremental cost of an additional packet is infinitesimally small.

This irrationality is already catching up to some telephone carriers. For example, Swisscom's text message revenue dropped 28 percent in the first quarter of 2012 because of users switching to Internet-based messaging services in order to save money. 

The use of flat-rate unlimited text message plans are likely to delay the inevitable for a while but, even with such plans, why spend extra money each year to use a function that is enabled for no extra cost by your basic data plan and will never generate enough traffic to kick you into a higher data bracket? Text message fees will soon be just another tax on the clueless and the telephone company's only hope is that the clueless don't talk to the clueful.