When Text-to-TV services began taking off three years ago, the sector looked like the path to easy money. A number of start-ups, including 2waytraffic and Yarosa Entertainment were making what seemed to be strong revenues by creating services for TV stations that would allow users to text in messages that would appear on the screens of the TV show they were “interacting” with. A text sent to a show could cost as much as $1-2, which was split between the provider and the broadcaster.

But in the wake of the UK’s call-in TV scandal, and the intense competition in the sector, a number of companies are flailing, some dropping out altogether. In February, US Blue Frog Mobile filed for Chapter 7 bankruptcy to liquidate its assets. Motion Avenue, a Finnish SMS-TV provider, is struggling and is rumored to be shutting down. (In January, founder Kim Lindholm moved to a new company, the social net games site Playray.) Dutch company Fruitlounge declared bankruptcy in February, but having got the creditors off their backs, have resurrected themselves as SL Media. In March, debt-ridden 2waytraffic agreed to a £1.08 ($2.16) per-share cash offer from Sony (NYSE: SNE) Pictures Entertainment’s 2JS Productions unit. More after the jump…

Despite the sector’s implosion, seven-year old Dutch SMS-TV technology provider Yarosa Entertainment, plans to soldier on, insisting that its rivals’ troubles will be its gain. It recently announced it had been acquired for an undisclosed sum by five-year old Dutch mobile content provider The Mobile Generation (TMG), which aside from its content business has a smaller SMS-TV division, and says the merger will give both companies a fresh start and a stronger base to work from. TMG CEO Hans De Back says that the combined companies are thinking of how to take SMS-TV to the “2.0 level”, or the next generation, though Yarosa will continue to operate under its existing name.

Yarosa’s claim to fame is its show Matchmaker. Users would text in their own name and the name of their partner, and Matchmaker would “calculate” the percentage of their match--all of which would appear on screen. The show runs on MTV networks in several countries including the UK and Netherlands and at its height was drawing in an average of 10,000 texts a day, with each text costing between $1-2 depending on the country. But De Back concedes that the numbers have declined, and that like any other business, content has to be constantly refreshed to keep the numbers high. Plus, the call-in scandals have made users wary of premium rate SMS services. To counter this, De Back says they are looking into ad-funded SMS-TV models, where the ticker tape would be sponsored, and a return text could include a message from the advertiser, while the text from the user would be free.

There’s no doubt, however, that the sector could not sustain the number of companies operating in the SMS-TV space. As Yarosa Chief Commercial Officer Pepijn van Collenburg, who joined the company in March from Netsize, notes, it was very easy for a competing firm to come in and undercut a revenue share deal by a few cents and steal a customer away. The response by many of the companies had, in turn, been to expand into new territories or countries to shore up the declining revenue cut, but then some found themselves hopelessly overextended, sprinting hard after new customers, while leaving their existing ones to languish, or be snapped up by a rival. “You could find yourself pressured in a corner over revenues,” says van Collenburg. “It was easy for companies to win customers, but to keep them is the challenge.”

• Sony Buying Interactive SMS-TV Quiz Maker 2waytraffic
• Interactive TV Provider Blue Frog Mobile Files For Bankruptcy