The sheer numbers involved have got many companies (mainly operators and vendors) salivating about the potential for ad-funded P2P sms. The idea goes that if an advertisement were to be inserted into every sms sent, they’ll be as rich as a very rich thing on Planet Rich.

So I thought it would be worth exploring, as a concept to see if there’s any real market here.

The main issue is the business model itself. If operators suddenly started inserting ads, I think there would be a backlash from consumers, unless there was some kind of value exchange. In other words, the sms would need to be reduced in price – or even offered free. Let’s assume that an sms currently costs about US 10 cents to send – and I appreciate that this is a huge generalisation, but it’ll do as a round figure. In that case, to replace that revenue, the operator would have to charge $100 in advertising, for every 1,000 they send out.

I’m not sure how attractive such advertising would be to potential advertisers, but let’s assume for a moment that it will be no more or less attractive than say, mobile web advertising. Actually, I doubt it would be, but let’s leave that for the moment. I’d say a very good rate for mobile web ads would be $25 per 1,000 ads (CPM) served, so you can quickly see that in order to make the same money that they do today, they’d have to sell ads at 4 times the current prevalent rate. So free is hard to make work.

Don’t forget that all this does is actually replace one source of income for another – there’s no guarantee that sms is price sensitive and that a free or discounted rate would result in greater volumes and thus more advertising and in turn, incremental revenues. So what the operators would have to do would be to ditch a highly effective, proven and highly profitable model, for one that is unproven and pure speculation, as well as one with no incremental upside. Hmmm – this isn’t a likely scenario, wouldn’t you say?

There are other considerations around this whole area, such as how the user experience works, but they seem to be largely academic if the fundamental business model doesn’t make sense. There may also be other workable business models in the sms area, such as sponsorship of sms alerts, although I’d speculate that this sector will start to decline at some point.

Naturally, I may well be missing something with this brief analysis, so please shed light if there is light to be shed. But I would suggest that the people talking this up haven’t thought it through too much, having been blinded by the very big numbers at the top of the page. And big numbers don’t automatically lead to big incremental revenues. After all, there are apparently 17 quadrillion flies in this world – or roughly 17,000 times as many flies as sms sent, if my maths is right – so all we need to do is charge a cent for every one of them and hey – bingo! I wonder why no one thought of that before.