While many of us have often felt as if we’re being ripped off by cellular carrier’s fees for text messaging, we didn’t know how much of a rip-off this was until the New York Times recently exposed it. On top of it all, the carriers are bordering on price-fixing, with all of the major carriers raising the fees for text message rates in harmony when the business was exploding. Pay-per-use text messages generally run about 20 cents today.
According to an estimate from the Gartner Group, approximately 2.5 trillion text messages were sent this year, which reflects a 32% increase from 2007. Gartner expects that number to continue to grow, and is estimating that 3.3 trillion text messages will be sent in 2009.
In September, the chairman of the Senate antitrust subcommittee, Senator Herb Kohl of Wisconsin, requested some information regarding the price of text messages from major carriers. He received vague or misleading responses. During its investigation, the New York Times received even less of a response. But thanks to 20 class action lawsuits filed against the carriers alleging price-fixing, we might get a better insight into what’s really happening here.
According to the Times, T-Mobile and AT&T attempted to say that cost-per-messages are unimportant because most people buy text messaging bundles, which lowers the cost of each message. T-Mobile also noted that the average revenue per text message has declined by more than 50% in the past several years. But the carrier leaves out a key point: costs and revenue don’t go hand-in-hand. According to the CTIA, usage has grown about tenfold over the past three years. If T-Mobile experienced typical grown, its text messaging revenue grew fivefold, even with the drop in per-message revenue. Furthermore, text messages cost carriers very, very little money to transmit since they are virtually free riders on a carrier’s network.
You see, text messages travel over a control channel in a wireless network. Carriers are using this same control channel whether a text message is being sent or not. Therefore, costs for sending tiny text messages are relatively unrelated to volume. According to Srinivansan Keshav, a professor of computer science at the University of Waterloo, “It doesn’t cost the carrier much more to transmit a hundred million messages than a million.” Professor Keshav also mentioned that once a carrier invests in the centralized storage equipment (which is relatively inexpensive) and the staff to maintain it, its costs are basically covered.
In our defense, until Senator Kohl began his inquiries, the public had little reason to question the business plan of text messaging. But now, knowing that carriers can provide virtually unlimited text messaging at no cost to themselves, we feel a bit ripped off by those unlimited messaging plans that cost $20 or so every month.
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