If the goal for app makers is to find exciting, new uses for smartphones, then TextPlus Inc. has it all backward.
The Marina del Rey company makes an app that does what the most basic cellphone can do: text and call. And from the beginning, it’s been a hit.
TextPlus’ free ad-supported namesake app and its paid counterpart have racked up 40 million downloads and its users have sent more than 55 billion texts since it debuted in 2009. The success is making waves for TextPlus, which recently announced it closed an $18 million fundraising round that the company has used to acquire Manhattan Beach picture messaging startup Jarvus Inc. and to expand its international presence.
And it’s caused major trouble in the world of cellphone companies.
That’s because cell carriers for years have raked in cash by charging premium rates for high-volume texting and calling plans. But customers now can do all the texting and calling for free using TextPlus or its many competitors and get by with the most basic plan.
“Don’t underestimate the people who are looking to save money,” said Scott Lahman, chief executive and co-founder of TextPlus. “Especially families with teenagers who text so much, they don’t want to be afraid their kids will go over the plan.”
The specter of teenagers going over the family texting plans is a growing fear among consumers. Even the cell carriers themselves have humorously acknowledged their plans’ tight limits with commercials that show frantic families rationing the monthly minutes and texts.
But for many struggling through a sluggish economy, big cellphone bills are no joke. A recent report in the Wall Street Journal showed the percentage of an average family’s income that is dedicated to wireless plans has jumped 10 percent in the past five years to an average of $1,226 annually.
TextPlus users can make calls and send texts for free to any device running the app. They can also send free texts directly to phones or make calls to anyone in the United States and Canada for one cent a minute.
The category of social messaging apps – which includes TextPlus and its competitors, WhatsApp and TextFree, as well as the messaging services in Facebook and Google’s mobile apps – are called “over-the-top” services because they go around the cell carriers. The runaway popularity of over-the-top apps has changed the ways carriers make money.
This year telecom operators around the world are projected to lose $23 billion as texting moves to these apps, according to a report by London technology research firm Ovum Ltd.
In response, many of the U.S. cell companies have tried to stem the losses by doing away with “bucket plans” for a fixed number of minutes and texts and instead adopting unlimited models.
“They make the unlimited plans sound like a big gift, but if they stuck to the old model, the revenue would continue to go down,” said Jan Dawson, an analyst at Ovum’s New York office. “Over the top apps have made Verizon and AT&T limit customers’ options no matter how much their usage is.”
The founders of TextPlus made their way into telecom through the video game industry. Lahman and co-founders Austin Murray and Zack Norman met while the three worked at Santa Monica’s Activision Inc. They left to form Jamdat Mobile, which was one of the earliest makers of cellphone games and the creator of the first three games for iPods. The company went public in 2004 and was later acquired by Redwood City’s Electronic Arts for $680 million to head up the company’s mobile gaming division.
The three left EA in 2007 to go back into the startup world, this time nowhere near games, but still close to a young audience.
“We saw that teenagers were using text messaging as a form of their voice and they were still being served the same stupid black and white text messages that didn’t look like a natural conversation,” Lahman said. “Our core thesis was to innovate text messages.”
The initial product was a free text messaging service through short codes – five-digit strings that can work as a phone number for text messages. At first people sent out messages through a text to the company’s shortcode, 60611, which was then routed to the intended recipient. This process, although cumbersome, gave people the ability to send out texts to entire groups – an innovation in the pre-smartphone era.
The company’s original name, Gogii, came from matching the numbers in their 60611 shortcode to similar-looking letters. The company changed its name to TextPlus this month.
In 2009, the company released an app version of its texting service for iPhones and iPod touches and later gave customers an actual telephone number. Lahman said it caught on instantly.
“We had one million downloads in our first month, which beat our estimates by 990,000 downloads,” he said. “It was a rocket ship from there.”
TextPlus added photo messaging in 2010 and calling a year later.
Including this recent round, TextPlus has raised $46 million in venture capital and grown to more than 100 employees. Most of them are tightly packed on the third floor of a Marina del Rey office complex, with windows that overlook the exit ramp of the Marina Expressway.
TextPlus’ income is mostly from banner ads that are displayed within the app and sponsored videos that users can watch to gain calling minutes. TextPlus says it became profitable last year. Although the company declined to release specifics of its take from mobile ads, Lahman said the company brings in monthly revenue “in the seven figures.”
That claim is matched by TextPlus competitor TextFree, made by Pinger Inc. in San Jose. Greg Woock, Pinger’s chief executive, said his texting and calling app made $20 million in revenue last year.
Executives at these companies say their over-the-top apps work well with mobile advertising because users spend so much time in them. As opposed to Facebook or Twitter, where many duck quickly in and out of an app, people making calls or sending texts are constantly looking at the phone. Lahman says the average TextPlus user spends 75 to 80 minutes in the app every day.
Even though the success for over-the-top apps has come at the expense of cell carriers, the two sides are better described as strange bedfellows than bitter enemies.
Lahman says his company has worked closely with cell companies to help build the infrastructure that sends messages to phones not running the TextPlus app. Earlier this year Pinger got an investment from German phone company Deutsche Telekom AG as part of a fundraising round. And because these apps work on iPod touches, tablets and other devices that young kids might own before they get a phone, cell companies see the services as a gateway to future customers.
“We give millions of kids their very first phone number,” Woock said. “The cell companies are very interested in using us as a migration path to the family plan and eventually getting Junior to use that phone number on his network.”
However, there’s a sense among some execs at over-the-top app makers that Pandora’s box has been opened. TextPlus co-founder Norman points out that because the world of calling and texting is now available for nearly every electronic device, it let users view a world of communication that isn’t dominated by phone companies.
“Everything is different now with these kinds of apps,” Norman said. “I have a feeling in 10 years we’re going to look back and say, ‘Remember a time when we needed to use a phone to make phone calls?’”
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