iMessage lets you send messages within the iOS ecosystem without having to use SMS. For those that pay for SMS, this may mean that they will be saving $5-$20 per month, which is real money. More importantly, this also means that those that have wifi-only iOS devices (i.e., iPod Touch, wifi iPad) can get SMS-style performance without having to install an app or use a separate service, and, believe me, that's a big deal.
iMessages integrates into the normal Messages app that all of us with iPhones are used to using. For those that use/used BlackBerrys, this makes SMS messages and iMessage similar to the "river of messages" format that BlackBerry uses for all inbound and outbound messages, even though e-mails stay separate in the E-mail app for iOS.
You can send contacts and locations; contacts you can send now with SMS, but the location thing is an improvement and I would expect that if that's available through the API, some really cool apps will make use of it.
Like instant messaging, you can see in real time when someone is typing a response, so, unlike SMS, you don't have to wonder if your message has just been blown out into the ether. Additionally you can enable read receipts and delivery receipts, similar to those available in Outlook and other e-mail clients, something that is definitely not available with SMS.
As with most Apple stuff, I expect there will be a walled garden approach to interoperability -- you'll likely be able to message back and forth in OS X, but there probably won't be apps that allow you to iMessage back and forth on BlackBerry, Windows Mobile, or Android. The fact that you won't be able to access the service on a non-iOS device makes SMS a carrier-based standard for cross-platform short messaging, albeit with a more limited feature set (everyone will compare regular SMS with iMessage features and regular SMS is unlikely or probably unable to be improved by the carriers). Those that need that interoperability will like keep their SMS packages while others may not, though it is pretty complicated (if not impossible) to get carriers to actually disable SMS from a device these days and will likely become more difficult once iMessage actually rolls out.
The one thing that I have noticed with SMS that will likely make me keep it is the fact that it works whenever there is not a data connection; SMS actually sends messages in the gaps in voice traffic, which is why, when you can't get a data connection or the network is so congested you can't make a call, your SMS messages will still send a receive (sometimes with a delay). Based on the fact that iMessage works with wifi and based on some of the features, I'm making the reasonable assumption that a data connection of some kind (Edge or 3G or wifi) is required to make iMessage work, and those of us with iPhones know that data connections are not always as reliable or pervasive as we would like.
My opinion is that the carriers aren't going to put Apple in the penalty box for biting into SMS revenue, but they are likely to find something else to ding consumers for to ensure that there is no gap in revenue.
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