What Carriers Aren't Eager to Tell You About Texting

bealtine

By RANDALL STROSS
Published: December 26, 2008

http://www.nytimes.com/2008/12/28/business/28digi.html

TEXT messaging is a wonderful business to be in: about 2.5 trillion messages will have been sent from cellphones worldwide this year. The public assumes that the wireless carriers’ costs are far higher than they actually are, and profit margins are concealed by a heavy curtain.
Skip to next paragraph
Stuart Goldenberg

Senator Herb Kohl, Democrat of Wisconsin and the chairman of the Senate antitrust subcommittee, wanted to look behind the curtain. He was curious about the doubling of prices for text messages charged by the major American carriers from 2005 to 2008, during a time when the industry consolidated from six major companies to four.

So, in September, Mr. Kohl sent a letter to Verizon Wireless, AT&T, Sprint and T-Mobile, inviting them to answer some basic questions about their text messaging costs and pricing.

All four of the major carriers decided during the last three years to increase the pay-per-use price for messages to 20 cents from 10 cents. The decision could not have come from a dearth of business: the 2.5 trillion sent messages this year, the estimate of the Gartner Group, is up 32 percent from 2007. Gartner expects 3.3 trillion messages to be sent in 2009.

The written responses to Senator Kohl from AT&T, Sprint and T-Mobile speak at length about pricing plans without getting around to the costs of conveying text messages. My attempts to speak with representatives of all three about their costs and pricing were unsuccessful. (Verizon Wireless would not speak with me, either, nor would it allow Mr. Kohl’s office to release publicly its written response.)

The carriers will have other opportunities to tell us more about their pricing decisions: 20 class-action lawsuits have been filed around the country against AT&T and the other carriers, alleging price-fixing for text messaging services. Timothy P. McKone, AT&T’s executive vice president for federal relations, told the senator that the suits had been filed “since your letter was made public” and said that he was “eager to clear up any misunderstanding.”

T-Mobile and AT&T contended in their responses to Mr. Kohl that the pay-per-use price of a message is relatively unimportant because most messaging is done as part of a package. With a $10 or $15 monthly plan for text messaging, customers of T-Mobile, AT&T and Sprint can effectively bring the per-message price down to a penny, if they fully use their monthly allotment.

T-Mobile called Mr. Kohl’s attention to the fact that its “average revenue per text message, which takes into account the revenue for all text messages, has declined by more than 50 percent since 2005.”

This statement seems like good news for customers. But consider what is left out: In the past three years, the volume of text messaging in the United States has grown tenfold, according to CTIA — the Wireless Association, a trade group based in Washington. If T-Mobile enjoyed growth that was typical, its text messaging revenue grew fivefold, even with the steep drop in per-message revenue.

The lucrative nature of that revenue increase cannot be appreciated without doing something that T-Mobile chose not to do, which is to talk about whether its costs rose as the industry’s messaging volume grew tenfold. Mr. Kohl’s letter of inquiry noted that “text messaging files are very small, as the size of text messages are generally limited to 160 characters per message, and therefore cost carriers very little to transmit.”

A better description might be “cost carriers very, very, very little to transmit.”

A text message initially travels wirelessly from a handset to the closest base-station tower and is then transferred through wired links to the digital pipes of the telephone network, and then, near its destination, converted back into a wireless signal to traverse the final leg, from tower to handset. In the wired portion of its journey, a file of such infinitesimal size is inconsequential. Srinivasan Keshav, a professor of computer science at the University of Waterloo, in Ontario, said: “Messages are small. Even though a trillion seems like a lot to carry, it isn’t.”

Perhaps the costs for the wireless portion at either end are high — spectrum is finite, after all, and carriers pay dearly for the rights to use it. But text messages are not just tiny; they are also free riders, tucked into what’s called a control channel, space reserved for operation of the wireless network.

That’s why a message is so limited in length: it must not exceed the length of the message used for internal communication between tower and handset to set up a call. The channel uses space whether or not a text message is inserted.

Professor Keshav said that once a carrier invests in the centralized storage equipment — storing a terabyte now costs only $100 and is dropping — and the staff to maintain it, its costs are basically covered. “Operating costs are relatively insensitive to volume,” he said. “It doesn’t cost the carrier much more to transmit a hundred million messages than a million.”

UNTIL Mr. Kohl began his inquiries, the public had no reason to think of the text-messaging business as anything but an ordinary one, whose operational costs rose in tandem with message volume. The carriers had no reason to correct such an impression.

Professor Keshav, whose academic research received financial support from one of the four major American carriers, discovered just how secretive the carriers are when it comes to this business. Two years ago, when he requested information from his sponsor about its network operations in the past so that his students could study a real-world text-messaging network, he was turned down. He said the company liaison told him, “Even our own researchers are not permitted to see that data.”

Once one understands that a text message travels wirelessly as a stowaway within a control channel, one sees the carriers’ pricing plans in an entirely new light. The most profitable plan for the carriers will be the one that collects the most revenue from the customer: unlimited messaging, for which AT&T and Sprint charge $20 a month and T-Mobile, $15.

Customers with unlimited plans, like diners bringing a healthy appetite to an all-you-can-eat cafeteria, might think they’re getting the best out of the arrangement. But the carriers, unlike the cafeteria owners, can provide unlimited quantities of “food” at virtually no cost to themselves — so long as it is served in bite-sized portions.

Randall Stross is an author based in Silicon Valley and a professor of business at San Jose State University. E-mail: [email]stross at nytimes com[/email].

crawler

Nothing new there really....

Do you know it actually costs more to print money that it does for an MNO to send a text message so while it may be true to say "it's a license to print money" - it would be an inaccurate understatement!!

bealtine

http://www.informationweek.com/news/mobility/messaging/showArticle.jhtml?articleID=212700130&cid=RSSfeed_TechWeb

Text Messaging Rates Questioned Again

Industry watchers and politicians say the cost to transmit the growing number of SMS messages is not in line with the rising fees.

By Marin Perez
InformationWeek
December 29, 2008 06:40 PM

The CTIA said the volume of text messages has grown tenfold over the last three years, and SMS continues to be a major revenue generator for the wireless carriers.

The four major U.S. wireless telecoms have doubled the price of individual text messages during that span, and some industry watchers and politicians suggest that operational costs are not tied with the increase in volume.

In an interview with The New York Times, Srinivasan Keshav, professor of computer science at the University of Waterloo, Ontario, said text messages are sent using space reserved for operation of the wireless network. Because of this, Keshav contends that sending massive amounts of SMS costs wireless telecoms very little once they've invested in staff and centralized storage equipment.

"Operating costs are relatively insensitive to volume," Keshav said. "It doesn't cost the carrier much more to transmit a hundred million messages than a million."

Earlier this year, Sen. Herb Kohl, D-Wis, sent a letter to the four largest U.S. carriers expressing concern over the pricing of text messaging.

"What is particularly alarming about this industry-wide rate increase is that it does not appear to be justified by rising costs in delivering text messages," Sen. Kohl said in the letter. "Text messaging files are very small, as the size of text messages are generally limited to 160 characters per message, and therefore cost carriers very little to transmit."

Representatives from AT&T (NYSE: T), Sprint (NYSE: S), T-Mobile, and Verizon (NYSE: VZ) Wireless did not respond to press inquiries on the cost of transmitting SMS messages by press time. The carriers have argued that the individual cost of text messages have grown, but the majority of customer buy SMS in package plans which offer cheaper bulk rates.

"Although your letter states that carriers' prices for text messaging appears to have increased since 2005, the opposite is true," T-Mobile's CEO Robert Dotson said in response to the senator's letter. "Since 2005, the prices that T-Mobile charges for text messages - 90% of which are purchased in texting packaging plans - have fallen by more than half. Not only have our prices for text messages fallen, T-Mobile leads its competition in bringing lower prices to consumers."

bealtine

crawler wrote: »

Nothing new there really....

No nothing really new there to those you know something of GSM etc. However not many "ordinary" people know the details of why it costs very little to text...and may wonder why a text message costs so much in relative terms, when it actually costs the carriers close to zero to send/receive messages.

This was posted in light of recent price increases in text rates and to counter some of the nonsense quoted as the reasons for those increases...

crawler

Yep - fair point....

It's funny - Text was designed as an engineering tool to allow engineers to communicate and test signaling etc....it was never even supposed to be a consumer product, that happened by accident.

Even with the investment needed in a multi media SMSC, storage, billing etc the actualy network usage per text is so tiny, it is almost negligible - in fact for those who remember when the first GSM networks launched in Ireland - texting was free. I even remember my old 088 analogue Motorola mobile brick being able to receive but not send text messages!!

cgarvey

Digifone gave me free texts for the first 13 months of their network as well (back in the days when there was damn all phones that supported it).

However, even though the carrier/network costs for SMS/MMS are as close to $0 as accounting can allow, there are plenty of people milking off licensing fees for the various software/hardware needed to support a decent capacity. I don't buy the argument that SMS should be free, but it sure as hell would not stand up to any sort of cost-based-pricing regulation, were it to be introduced.

crawler

cgarvey wrote: »

Digifone gave me free texts for the first 13 months of their network as well (back in the days when there was damn all phones that supported it).

However, even though the carrier/network costs for SMS/MMS are as close to $0 as accounting can allow, there are plenty of people milking off licensing fees for the various software/hardware needed to support a decent capacity. I don't buy the argument that SMS should be free, but it sure as hell would not stand up to any sort of cost-based-pricing regulation, were it to be introduced.

that is very true - but that is telecoms in general - vendors sure know how to charge - nothing like a good recession to fix some of that.....