Despite previously finding there was no case to answer for, in the UK, Ofcom is considering whether it should change its approach. Looking elsewhere suggests that imposing regulation in this market may not be in the long-term interests of end users.
Wholesale SMS termination is generally unregulated or deregulated in Europe – and has never been part of the EC’s list of telecoms markets warranting ex-ante regulation. In the UK, Ofcom has considered SMS termination as part of the market review process, but concluded that it should not be regulated in the same way as mobile call termination.
Australia has seen the introduction and removal of SMS termination regulation over the past decade. After moving to regulate SMS termination in 2014, the ACCC reversed its decision in 2019, citing the growth of OTT services. It has now decided not to impose regulation on A2P SMS termination as it may not be in the long-term interests of end users.
In the UK, Ofcom is focused in particular on the role of SMS in the A2P, or business messaging, market. However, its own research points to the increasing popularity of internet-based apps in A2P communications, while the dwindling volume of P2P SMS could indicate the course the A2P market will eventually follow.
Ofcom’s monitoring of the termination market is a response to complaints made to it over levels of pricing, innovation and competition. Though termination rates have risen slightly, they have declined over time in real terms. Also, as things stand, Ofcom has not identified market failure, while its research suggests a vibrant business messaging market.
By recognising the substantial changes that have taken place in the overall messaging market and by anticipating likely future technological shifts, Ofcom would avoid the imposition of unnecessary regulation that it would later only need to remove in the next review cycle.
Wholesale SMS termination is generally deregulated or has never been regulated in Europe
SMS termination is the wholesale service by which mobile operators enable an SMS, i.e. a text, sent from another network to reach a customer on their own network. Unlike the market for voice call termination on individual mobile networks, SMS termination has never been included within the EC’s list of telecoms markets susceptible to ex-ante regulation. According to our Mobile Telecoms Tracker, the wholesale SMS termination market has long-been deregulated or has never been regulated in the majority of European countries (see Table 1). In the UK, Ofcom has considered SMS termination as part of broader reviews into mobile call termination, ultimately concluding that SMS is not a close substitute for calling a mobile phone and that it should be excluded from the relevant product market definition (in line with the EC’s Recommendation).
Similarly, in Italy, AGCOM reviewed the market only once, in February 2013, and determined that it did not warrant ex-ante regulation. While AGCOM considered the market met the first criteria (high and non-transitory barriers to entry) of the three criteria test, it found that the second (a market structure that does not tend towards effective competition) had not been satisfied, pointing to a reduction in SMS termination rates over time, as well as the increasing use of alternative messaging services. In Denmark, the Danish Business Authority (DBA) has regulated wholesale SMS termination in the past, although all obligations fell away following the third round market analysis in 2015, which stated that the market should no longer be subject to ex-ante regulation. Also, the DBA was previously required by the EC to amend a proposed price control for SMS termination on the basis that it might be discriminatory.
In Australia, the ACCC is not satisfied that regulating A2P SMS termination would benefit end users over the long-term
On 21 June 2024, the Australian Competition and Consumer Commission (ACCC) released a final report on the regulation of the domestic mobile terminating access service (MTAS) over the next five years. It decided not to change the service description of mobile termination to include application-to-person (A2P) SMS termination, reflecting a departure from its preliminary position. In December 2023, the ACCC issued a draft report on whether nine wholesale telecoms services should continue to be regulated, or “declared”. The ACCC’s review looked at both A2P and P2P (i.e. person-to-person) SMS termination, provisionally concluding to include the former within the scope of MTAS. While the ACCC stated that the wholesale and retail markets relevant to this service have not materially changed in recent years, its draft decision was based on evidence that suggested commercially negotiated prices for terminating A2P SMS have been rising. Absent a declaration, the Commission considered that mobile operators would have the ability and incentive to increase rates further, which would have knock-on effects downstream.
This would not have been a novel move by the ACCC. In 2014, it decided to include SMS in MTAS as termination prices – despite not increasing over the past 10 years – were considered to be significantly above cost. However, in 2019, it then removed SMS from the MTAS service description, finding that ‘over-the-top’ (OTT) services were constraining mobile network operators’ ability to exercise market power for termination. The Commission also found limited evidence that the declaration of SMS termination had improved retail offers in A2P SMS and that there appeared to be increasing options for businesses in communicating with their customers other than SMS.
In its final decision, the ACCC states that it is “not satisfied at this point” that regulating A2P SMS termination services would promote the long-term interests of end users. It finds that while enterprises are relying heavily on A2P SMS for certain use cases (for example, due to its ubiquity, high open rates and ease of use), alternative communications channels may be close substitutes in certain instances, e.g. marketing. The Commission also states that despite rising A2P SMS termination rates between the mobile operators, wholesale and retail prices for A2P SMS services have been falling – which may suggest the presence of competitive constraint. On balance, the ACCC concludes it would not be appropriate to include A2P SMS termination in MTAS, but will closely monitor price movements in the A2P SMS markets and, if necessary, consider launching an inquiry into declaring A2P SMS services in the future.
In the UK, Ofcom is focused on the role of SMS in the A2P market despite the rising popularity of apps for business communications
On 26 March 2024, Ofcom issued its Plan of Work for 2024/25, outlining its areas of focus for the year ahead. The regulator stated its intention to review the framework governing the UK’s wholesale voice telephony markets for the April 2026 to March 2031 period, issuing a consultation in 2025/2026. Ofcom added that it will also be monitoring the wholesale SMS termination market and its impact on retail business messaging, and that it would consult in 2024/2025 if it considered there was a need for regulatory intervention. Ofcom is particularly focused on A2P – or business messaging – services, which are used by private and public sector organisations to communicate with individuals, typically via SMS over operators’ mobile networks. Termination on those networks is therefore a key input to the retail services offered by SMS aggregators, e.g. Infobip, to firms and public bodies.
The A2P market has grown over recent years, with SMS a common choice for certain purposes, including one-time passcodes used to login to online banking platforms, medical appointment reminders and parcel delivery notifications. However, Ofcom’s 2023 review of personal online communications services (OCS) – standalone apps and websites that provide messaging and calling – show that they are also an increasingly popular option to facilitate A2P communications, growing more rapidly than SMS-based business messaging. In the P2P segment, Ofcom’s review also shows how OCS messaging volumes have for a long time dwarfed those of traditional telecoms services (see Figure 1), reflecting the current state of the overall messaging market and hinting at what could transpire in A2P in the long-run.
Ofcom’s monitoring of the market is a response to complaints related to pricing, innovation and competition
Like the ACCC, Ofcom states that concerns have been raised with it about the effect of wholesale price increases – including the effect of stability of wholesale pricing on innovation in the retail market – and the lack of effective competition at the wholesale level that might otherwise constrain prices. Though the market for mobile voice call termination is regulated, Ofcom has not so far identified the existence of a market failure in SMS termination, nor suggested that the three criteria test could be met. Consequently, in market reviews dating back over 15 years, Ofcom has made no proposals to regulate SMS termination.
However, as the A2P market develops, Ofcom sees it delivering increasing utility to people that receive these messages. The regulator expects senders to have access to a competitive retail market for business messaging services, and is currently considering whether there is a case to intervene. In the UK, wholesale SMS prices have risen in recent years, but those increases have been modest (unlike the more considerable uplifts the ACCC states have occurred in Australia) and termination has become cheaper over time in real terms. In parallel, operators have faced certain cost impacts:
As providers of electronic communications networks/services, operators must comply with strict obligations under the Telecommunications (Security) Act – a burden that does not apply to OTT players. With the cost of compliance generally spread across the entire network and organisation, SMS may be expected to make a contribution;
With SMS a low-cost, high-return option for criminals looking to defraud consumers, operators have invested heavily in systems and technologies to detect and prevent scams. There is the risk that lowering termination fees may have the effect of exacerbating the problem; and
The much-reduced volumes of traditional messages means that operators’ costs of hosting an SMS platform are spread over a smaller base.
In light of higher unit costs together with significant investments in security and fraud prevention, it is therefore not inappropriate for operators to consider seeking a reasonable level of cost recovery. Also, given the reliability advantages of SMS as a messaging technology, and the relative cost of other methods of communicating with consumers or citizens – e.g. a stamp for a letter – it clearly remains good value for money.
On the potential impacts on retail innovation, it is unclear what negative outcomes concerned stakeholders foresee. Ofcom’s OCS review points to a vibrant communications market, with standalone apps and social media platforms with embedded messaging and calling functionality, which are “telecoms-like” in nature. These services are typically free and easy to access, and provide a highly-valued alternative to SMS, often with additional advanced features. The research also highlights A2P as an increasingly important and growing area for providers to monetise their services, with Meta describing its paid messaging offerings as a potential “next pillar” of its business, which may accelerate with the use of AI. Higher prices for SMS termination may actually support greater innovation and investment in OCS by encouraging senders to explore and possibly adopt alternative communications channels to SMS.
Considering the market in the round and through a forward-looking lens would avoid the imposition of unnecessary regulation
With little evidence at this stage on problems relating to competition, pricing or innovation resulting directly from the SMS termination market, Ofcom should monitor developments but avoid the temptation to introduce new regulation where it is not warranted. Firstly, messaging has changed dramatically since the emergence of mobile-based apps, including the launch of WhatsApp in the UK in 2009, requiring that the market is looked at in the round. As far back as 2013, AGCOM (and the EC) considered that SMS was potentially replaceable with alternative messaging services, which were capable of influencing the competitive conditions of the SMS termination market. The regulator also considered that it would not be profitable for operators to increase SMS termination rates due to the indirect constraints deriving from the presence of suppliers of such services.
According to Ofcom’s latest Wholesale Voice Markets Review, the volume of SMS/MMS messages has significantly decreased, driven largely by an increase in the use of OTT services. Between Q3 2019-Q3 2020, 14bn fewer SMS/MMS messages were sent than in the year to Q3 2019, reducing by 21%, from 67bn to 53bn. This trend has since continued, with OTT and in-app messaging replacing SMS volumes in the A2P market. While it was argued to the ACCC that WhatsApp’s low penetration in Australia means it is not a viable substitute for SMS, Ofcom notes WhatsApp’s strong competitive position and large user base in the UK, indicating it does offer a credible alternative. In considering prospective new SMP regulation in SMS markets, Ofcom must take into account the role and substitutability of OCS to avoid the risk of over-regulation at the wholesale level where effective competition exists downstream.
It is also vital that the regulator takes a forward-looking approach to assessing the state of the market in order to anticipate likely developments. Ofcom’s own data confirms a shrinking SMS market size coupled with the rising usage of OCS for business messaging, which is backed up by several third party projections. Meanwhile, the future adoption of Rich Communication Services (RCS), which may offer more favourable pricing and greater functionality than A2P SMS, could further drive the fall in SMS volumes – particularly with the support of Apple’s iOS 18 update. As such, regulatory measures targeting SMS termination over the 2026-2031 period could prove unjustified and disproportionate, especially if they then require removal in the subsequent review cycle. Such short-termist behaviour would involve an inefficient use of Ofcom’s time and resources, as well as those of industry.
Leveraging the high and growing adoption of smartphones, a better approach would be to encourage those organisations still reliant on SMS (e.g. GPs, financial institutions) to consider migrating to in-app messaging and notifications, similar to the ride-hailing and food delivering apps that have become commonplace across the UK. Alongside end-to-end encryption, apps offer an enhanced experience compared with SMS, including read-receipts and image and video sharing, which may improve interactions with end users and levels of customer service. SMS would remain a valuable option for specific – perhaps critical – communications given its ubiquity, simplicity, high open rates and the fact that its reach is not impacted by a lack of internet connection. Ofcom’s monitoring of the market should therefore adopt a holistic and future-oriented perspective, paying mind to data and technological developments to ensure it is guided by the evidence and avoids the introduction of regulation where it is not needed.
