Senate Anti-Trust Inquiry Into SMS Pricing

[mkrishnan]

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

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.

This analysis of the cost basis of providing SMS service was interesting also.

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.”

 

[mcavjame]

Yeah, I read that article this morning.

You always know something is up when no one will talk to you and information cannot be made public.

 

[mkrishnan]

Yeah, true. In the past, I've at least vaguely defended SMS pricing based on market economics and no data on what it costs to send them out. But this is very revealing. And while I guess there is some validity in the statement that per SMS pricing has gone down 50%, that's balanced by a lot of people like me who pay for a small SMS plan (400 for $4.99 or something like that) and use a small fraction (so I probably am paying on the order of $0.10-0.15 per SMS).

There are some things I wonder, though. What happens when the volume of SMS actually gets so high that the control channel becomes frequently full at the desired time of use?

 

[mcavjame]

There are some things I wonder, though. What happens when the volume of SMS actually gets so high that the control channel becomes frequently full at the desired time of use?

There is likely some throttle control that allows messages to be cached for short periods of time while a channel becomes clear. Given the size of messages, demand likely goes up and down very quickly.