Jeff Gelles: Will iPhone innovations curb high texting profits?

Could the latest iPhone software sound the death knell for one of the wireless industry's favorite cash cows, text messaging?

These tiny packages of data, about 160 characters, have had huge influence on how Americans - especially the young - communicate. They also generate big bucks for U.S. wireless carriers, which will collect about $21 billion this year, close to an eighth of their total revenue, for handling more than 2.1 trillion texts, says Recon Analytics' Roger Entner.

But there has long been a crack in that business plan's armor - a crack that Apple is now dramatically widening. Its wedge is an app, iMessage, built into the new iOS 5 mobile-operating system that Apple released Wednesday for current iPhone users. With iMessage, iPhone users can bypass the tollgates where carriers collect as much as 20 cents for an individual text.

What does iMessage do?

On one level, it simply allows iPhone users to text each other free - within their data plans' limits - without having to pay for individual texts or a monthly texting plan. But on another, it lays bare a large imbalance in data pricing - and, just a week after Steve Jobs' death, once again demonstrates Apple's capacity for developing disruptive technologies.

The leading U.S. carriers now sell single texts for 20 cents apiece. That price quickly pushes anybody but the truly occasional texter into buying a bundle of texts, perhaps 500 or 1,000 a month for $5 or $10, or unlimited texts for $20 a month. Thanks to bundles and text-crazed teens, the average cost per text has fallen to about 1 cent, Entner says.

But since smartphones such as the iPhone have turned handsets into mobile computers, the carriers have also been pushing data plans - in fact, they require smartphone owners to sign up for one, often for as much as $30 a month. AT&T offers one of the lowest entry prices: 200 megabytes for $15 a month.

That price illustrates the imbalance: If you send a short message as a text, you pay as much as 20 cents for a file of up to 140 bytes. That's the equivalent of paying more than $1,400 per megabyte of data.

Even if it costs you just a penny, you're still paying through the nose: more than $70 per megabyte, or - gulp - $70,000 per gigabyte.

Of course, the carriers argue that you're not paying for data by the pound, you're paying for convenience. And they have a point. A recent Pew study illustrated the extent to which Americans love their texts, whatever the price.

The median user age 18 to 29 sent or received 40 texts a day. A quarter of users 18 to 24 topped 100 texts a day. And among users of all ages who text, nearly a third prefer them to voice calls.

Still, critics have long portrayed text pricing as evidence of inadequate wireless competition - especially after the carriers raised their text prices to 20 cents nearly in lockstep three years ago. The next year, in testimony to the U.S. Senate subcommittee on antitrust, competition policy and consumer rights, computer scientist Srinivasan Keshav estimated that the actual cost of transmitting a text was less than a third of a cent, producing profit margins of 80 to 98 percent.

Keshav says the carriers have never disputed his analysis of texting's real costs. And he notes that there are plenty of products, such as perfume, whose price tags far exceed the cost of ingredients.

But Keshav, a professor at Ontario's University of Waterloo, says the rapid spread of smartphones, including Androids, BlackBerrys, and other iPhone competitors, helped set the stage for change. "If you have a data plan, then you have to ask yourself: 'Why bother to pay that much?' " he says.

Indeed, says Keshav, it was the BlackBerry, developed by Canada's Research in Motion, that paved the way for iMessage with its popular BlackBerry Messenger feature. With BBM, BlackBerry owners can send short messages to other BlackBerry owners without opening their e-mail or paying for texting.

Entner says BBM and similar Android apps use the already-paid-for data service to bypass the wireless carriers' texting fees. What differentiates iMessage is that Apple makes the bypass seamless - it's now the main texting highway between iPhone owners.

It may not be the only game-changing technology in iOS 5 - Entner also sees such potential in Apple's new PC Free, which allows non-computer owners to use a smartphone. And Siri, the personal assistant that ventures into artificial intelligence, will undoubtedly captivate those who buy the new iPhone 4S starting Friday. Alas, it's not included on iOS 5.

But iMessage shows how fast things can change in technology, especially when prices and services get out of sync.