Why Randall Stross and the New York Times Don't Get Wireless

Posted by: Spencer Ante on December 31, 2008

This Sunday, New York Times business columnist Randall Stross devoted his column to dissing the U.S wireless industry for doubling the cost of text messages to consumers to 20 cents from 10 cents. But what really got Stross lathered was his claim that the cost of transmitting text messages is far less than the public supposedly assumes.

Stross backed up his argument by quoting Srinivasan Keshav, a computer science professor at the University of Waterloo, who said that “it doesn’t cost the carrier much more to transmit a hundred million messages than a million.” Stross also noted that 20 class action lawsuits have been filed around the the country against AT&T and other carriers, alleging price-fixing for text messaging services.

Stross is not only flat out wrong, but his argument is overly simplistic and suggests that he doesn’t really understand the economics or business model of the wireless industry.

Let me explain.

First off, it costs more to send more text messages—contrary to what Stross and Keshav claim. Verizon Wireless, AT&T and Sprint declined to speak with Stross. But James Gerace, a spokesman for Verizon Wireless, told me in an email that the company “had to invest an additional $200 million in the network just to accommodate the ‘08 volume in text messaging.” That is not chump change.

“This op-ed is bunk,” wrote Gerace, adding that he sees the Times story as an example of “trial lawyers placing it looking for a new revenue stream.”

Second, Stross totally discounts the price of wireless spectrum, which is really, really expensive. In the most recent spectrum auction, wireless carriers and other technology companies paid an astounding $19.6 billion to acquire the nation’s most desirable remaining airwaves. Yes, Stross mentions that the “carriers pay dearly for the rights to use” spectrum. But in the next breadth he writes off the cost by noting that text messages are “free riders” that piggyback on the control channel of the wireless network.

This gets me to my last point. Stross doesn’t seem to grasp the current economics of the wireless biz. Here’s the deal. The voice side of the business is becoming increasingly commoditized. So the future success of the industry hinges on the ability of carriers to grow the revenue they get from data services such as text messaging, wireless web surfing and wireless applications.

That’s the fundamental reason why carriers have doubled the price of text messages from 10 cents to 20 cents over the last few years. I have no idea if the carriers engaged in price fixing. If they did, they should be punished. But there is a legitimate economic reason why they have raised prices for individual text messages.

Even if the marginal cost of sending text messages declines or is less than the public assumes (I’m hard-pressed to believe the public has thought much about this), carriers have to find a way to pay for their expensive investments in spectrum and network technology that allow them to create speedier new services that keep and attract new customers. Raising the cost of text messaging is part of the price we pay to fund innovation.

Now, don’t get me wrong. I don’t like price increases as much as anyone. And I wasn’t happy when my provider, Verizon Wireless, jacked up those prices. However, all of the carriers offer customers volume discounts on text messages. And there are varying levels. You don’t have to buy an unlimited plan for $10 or $15 a month. I signed up for a program that gives me 250 text messages for $5 a month, and I am happy with it. That’s 2 cents per message.

What does Stross want the carriers to do? Does he want the government to fix the prices of text messaging? The U.S. wireless industry has grown in large part due to its relative lack of regulation. Micro-managing prices would be a horrible idea, and discourage future investment in broadband technology the nation sorely needs.

Perhaps Stross believes that the industry has seen too much consolidation. But he doesn’t come out and say that explicitly. Some economists and public policy wonks have argued that multiple telecom mergers and acquisitions have led to higher prices and hurt the competitiveness of the U.S. communications industry.

Point is, there are plenty of reasons to criticize the U.S. wireless industry. Poor customer service, over-control of their networks, and shady marketing tactics are just a few of the industry’s problems. But giving them a hard time for raising the price of a valuable and popular service should not be one of them.

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Reader Comments

Bob Bentz

January 5, 2009 09:30 AM

This entire talk about a .20 text message is ridiculous. Over 99% of Americans who are considered "active text message users" have some kind of bucket plan, even if it's only 250 per month as the author has. The ridiculous .20 per message scenerio is only an attempt by the carriers to get you to convert to a bucket plan of some kind. I doubt very many Americans who really use text messaging actually pay that .20 per message--at least not for long.

Bob Bentz
Text Message Blob

Michael Becker

January 5, 2009 09:44 AM

The author of this article raises a number of valid and good points in defense of the wireless carriers and their role with in the mobile ecosystem. I believe the key message from this piece is that everyone that plays a hand in the mobile ecosystem and uses it for personal or commercial purposes should attempt to understand the demands and drivers from each player and each industry that is leveraging the incredibly powerful and important medium that is the mobile channel.

One trade group that is helping organize a mobile industry conversation is the Mobile Marketing Association (www.mmaglobal.com). The MMA will be holding an event January 12 (http://www.mmaglobal.com/event/2009/01/12/day), “How to Cultivate A Successful Mobile Marketing Ecosystem,” which will bring members from every sphere of the mobile marketing ecosystem (http://www.mmaglobal.com/resources/mobile-marketing-ecosystem) together to have a conversation on how to understand, respect and respond to the needs of the industry players within each of the key spheres of the mobile ecosystem. In addition, on January 13, the MMA will be holing its Consumer Best Practices Industry Forum (http://www.mmaglobal.com/event/2009/01/13/day) to encourage an open discussion on best practices around the use of the mobile channel for marketing and related commercial purposes.

It is only through vision and collaboration that we can get the most effective use and value out of the entire mobile ecosystem. If you value the type of discussion that this article triggers, I encourage you to join the MMA, The Direct Marketing Association (www.the-dma.org) and/or related group pertinent to your industry and lend your voice in order to keep the conversation move forward.

Andrej Czyz

January 5, 2009 06:52 PM

Frankly, all of this is secondary to the real issue: raising my rates without a marked increase in service quality or features is status quo for the telcos and wireless carriers.

Why on earth would any rational person want to pay MORE for the exact same service? Especially when, in virtually every other instance, the idea is that the more common a product becomes the LESS it's worth and the MORE is offered.

Say what you will, Spencer, but this smells and tastes like good old fashioned corporate greed to me (which is part of the reason why people left companies like AT&T in droves in years past: high cost, poor service). Capitalizing on a market trend by charging higher premiums without bringing any additional value to the consumer is a sure fire way to cull their numbers in the long run. This strategy has NEVER worked and it never will.

Such tactics may feed "innovation", but in a recession they just piss me and a lot of other consumers off and force us to look elsewhere for our "commodities".

Chris

January 6, 2009 08:50 AM

There's a difference between raising the price and DOUBLING it. An increase to 12 cents would still have been a whopping 20% increase.

Nick

January 6, 2009 05:23 PM

the most annoying part of it is that I'm already paying for UNLIMITED DATA... $40/month... and the kid at the desk is going to try and explain to me that a text message isn't data? GUESS WHAT PEOPLE... IT'S AALLLLL DATA. The voice call, then internet page, the text message... it ALL gets chopped up into little data bits and sent over the wire the exact same way.

Also, most SMS providers have an "SMTP Bridge"... meaning, you can send/receive texts through an email address (like, yourphone# at vtext.com)... SOOO... you could use your unlimited dataplan to send/recieve unlimited texts/images/videos... and not pay any extra. HOW CAN THIS BE?

I can sit at my house on my computer and make UNLIMITED VOIP calls and send UNLIMITED emails and download UNLIMITED web pages for the same fee... but have to pay comparatively outrageous fees on a mobile phone. bull

and whats this "i got an email from someone and he said they spent $200mil"? thats all? an email? and you took him for his word? that's real in-depth investigation!!

anyways... yes, this is capitalism... but effective capitalism requires real competition... and if 90% of the market is just going to ratchet up prices in lock-step for no reason... then its time to cut them down.

-dumb

Andrew

January 6, 2009 06:07 PM

I have to agree with Chris (1/06/09) who says raising price to $.12 would be a hefty 20% increase.

As a consumer of text messages (but not the other "technological innovation" in mobile phones per Spencer Ante), I abhor the idea of paying 100% more in order to offset increased technical advancement costs.

Telcos do not take action in order to save their customers money. I say push forward with price-fixing class actions. It is about time we as consumers take back some ground against major corporations we are slaves to.

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BusinessWeek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, Douglas MacMillan, and Spencer Ante dig behind the headlines to analyze what’s really happening throughout the world of technology. One of the first mainstream media tech blogs, Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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