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.