SendHub is the hot new YC backed entrant into the group texting space with a business model twist, un-metered freemium plans. To recap some of my earlier blogs, free group texting is wildly popular but has no viable business model other than shifting the traffic from SMS to TCP. Metered group texting is a viable business but the usage caps and high costs limit it to niche usages. SendHub is trying to chart a new course between these two poles with a freemium offering of un-metered all you can send plans. Their published growth rates are close to the growth rates the free group texting offerings (groupme, disco.com, the orginal groupflier) experienced proving out the popularity of un-metered group texting, the elephant in the room is the freemium conversion rates against a rapidly escalating Twilio bill. To be breakeven they probably need a conversion rate around 10% which is 3-5x higher than typical freemium conversion rates. Their recent funding round of $500K each from 4 top tier VC's signals that they are getting great growth and the VC's are willing to spend some money to test if they can get to the needed conversion rates. If they can they would have successfully broken the SMS cost barrier which has held the industry back. If not they will join a long line of group texting startups that have funnelled VC money to the Telcos.

 After reading the Codahale blog on password encryption I decided to move from a salted hash mechanism to bcrypt for password storage in Leostream Cloud Desktops. The Crypt-Eksblowfish CPAN module looked like a good candidate so I downloaded and installed it and a few prerequisites. The documentation is a bit terse but I found this helpful post on perlmonks which clarified a few details for me. I modified my password saving and checking functions and voila, state of the art password encryption.

Update 1: I modified the code to use the standard bcrypt storage format and switched to a better salt generation mechanism.

Update 2: Some Hacker News commentators have pointed me at the Authen::Passphrase module as a better option.

Update 3: I modified the code to avoid a timing attack.

Thanks for all the feedback.

Take the Google Plus tour and check out Huddle. Google has decided that group texting is valuable enough to be a major component of Google Plus. I assume Huddle is from Disco.com which was created by the Google Slide unit. The seamless combination of free group texting with circles should be a big winner for Google. This is bad news for Groupme and other stand alone free group texting services. Maybe Telco's won't be the big winners in the free group texting space after all and do other social networks need to add group texting functionality?

My previous post detailed the economic model of free group texting. Unfortunately GroupFlier was unable to raise further funding to continue in the free group texting space despite impressive growth numbers so we converted to a pay as you go model. The consistent VC feedback was doubt about the client conversion rates and concern about the large amounts of cash needed to support rapidly growing SMS traffic. It looks like Groupme is going to the only funded competitor in the free group texting space, which is unusual for a space with such strong consumer demand. To paraphrase a Paul Graham quote about the music industry maybe the free group texting business is nothing more than a wealth transfer scheme from VC's to telcos :-)

Group texting basically adds mailing list capabilities to SMS and is a great way for groups to stay in touch in real time. Consumers love it but the only viable non-telco business model is to switch the traffic from SMS to TCP to eliminate the SMS costs. The problem with that is twofold. First iPhone and Android push notifications are not as robust as SMS, they work, but not all the time or as well as SMS. Second everyone in the group needs to have a smart phone and be willing to download and install an application, that is a big hurdle to group formation.

The solution is clear, the telcos need to to offer a SMS group texting service with flat fee monthly pricing. The feedback we got when we switched from a free service to a paid group texting service was that the cost and uncertainty of per message pricing was too high for 95%+ of the market but unlimited group texting for a $1-$5 per month added to your cell phone bill was acceptable for a lot of folks. The telcos are the only people in a position to offer this service and I believe they will as SMS revenue comes under increasing attack from Apple and other TCP based group texting products. If you are a telco looking for a great group texting platform you should talk to us.

Group texting is the white hot topic at SXSW and the most common question is "how do you make money when you pay for every SMS". Here is the answer.

Smart phone adoption makes the group texting business model work. As the base switches to smart phone clients you eliminate SMS charges and have valuable mobile real estate for ads as you know location and interest. Our modeling shows that the break even point is around 25% of the base using smart phone clients instead of SMS to send and receive messages. If you build a network of 6MM users with 2MM smart phones you are at 40MM annual revenue with a 10MM EBITDA. 

The users are incentivized to switch to clients by all the cool features you can add like location, pictures, conference calling etc., they also eliminate SMS charges for their group texting. Group texting is a high volume, sticky application. 20% of our base uses the product every day, averaging 30 messages per member per week. The cohort analysis shows close to 100% retention rates after the initial churn and the customer acquisition cost is less than a dollar per member.

These numbers are from our experience at GroupFlier which is direct competitor to Groupme. We launched 18 weeks ago and hit 1MM messages in 12 weeks and 2MM in 16 weeks. To sum it up the key to group texting is switching users from money losing SMS traffic to profitable TCP/IP traffic and the recent surge in smart phone adoption makes this possible which is why this market is getting so much hype.