SMS accounts for 12 percent of European mobile operators’ revenues today, and operators are right to tap the medium’s full potential now because SMS revenues will peak next year, according to a new Brief by Forrester Research B.V. (Nasdaq: FORR).

Forrester interviewed executives at 20 European mobile operators and found that their networks carry, on average, 156 million SMSs each month — broken down into 89 percent person-to-person (P2P) traffic and 11 percent application-to-person (A2P) traffic like weather updates or jokes via SMS. Interviewees already rely on SMS for 11 percent of revenue, on average.

“Mobile operators are right to exploit SMS’ full potential now,” said Forrester Analyst Michelle de Lussanet. “Forrester’s five-year forecast for mobile messaging shows that SMS revenue will peak next year — SMS traffic volumes will stagnate in 2004, and effective price per SMS will fall sharply. In 2007, Forrester forecasts SMS revenues will represent 47 percent of total mobile messaging revenues, multimedia messaging (MMS) will bring in 32 percent, mobile instant messaging (IM) 10 percent, mobile email 9 percent, and enhanced message service (EMS) 3 percent.”

Forrester asserts that SMS traffic will rise to 11.5 billion messages per month in 2004 — a 14 percent gain on today’s traffic. But as multiple heirs to the SMS throne, including EMS, MMS, IM, and email, take hold in 2004, substitution will begin and SMS volumes will drop off. In 2007, volumes will slow to 11.1 billion messages per month — still 10 percent more than in 2002. Premium prices for P2P SMS and A2P SMS won’t withstand cutthroat competitive pressure. Operators will increasingly give away P2P SMSs or bundle them cheaply to prepay customers, dropping the effective average price per message from €0.12 today to €0.07 in 2007. A2P effective message pricing will show a similar fall — down from €0.30 in 2002 to €0.20 in 2007 — as operators’ revenue shares decline from today’s 30 percent to 50 percent margins to a more realistic 15 percent to 30 percent.

“The combination of stagnating volumes at lower per-message effective prices translates into an early SMS revenue peak at €19.6 billion in 2003,” de Lussanet added. “In 2007, SMS revenues will fall to €11.8 billion, down 33 percent from 2002. However, SMS will still dominate mobile messaging by both traffic and revenue that year — new messaging alternatives will take time to penetrate the installed base, and consumers’ behavior won’t change quickly.”