Cell Phone Providers Dirty Little Secret: Cashing in on SMS Text Messages

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More than 2.5 trillion SMS text messages have been sent from cell phones worldwide this year. This means that text messaging brings in billions of dollars in revenue for the world’s four major cell phone carriers. In fact, it’s estimated that SMS text messaging revenues could even top $165 billion by 2011. (SMS stands for “Short Message Service”.)

So, if the text messaging business is so lucrative, why have AT&T, Sprint, T-Mobile, and Verizon Wireless doubled the pay-per-use-price for messages from 10 cents to 20 cents? So far, no one knows. What we do know is that 20 class action lawsuits alleging price fixing have been filed across the nation against major carriers such as AT&T and others.

The likely answers are “Because they can,” and “Because they’re greedy.”


 

Senator Herb Kohl (D-WI) and Chairman of the Senate Antitrust Subcommittee attempted to get some answers from the four major cell phone carriers about text messaging costs and the increase in pricing. Unfortunately, his attempts were unsuccessful. Verizon Wireless refused to speak with Mr. Kohl, and T-Mobile and AT&T did not answer his questions. Instead, T-Mobile and AT&T offered the following response, “the pay-per-use-price of a message is relatively unimportant because most messaging is done as part of a package. When customers opt for a $10 or $15 monthly plan for text messaging, they can bring the price per message down to a penny, if they fully use their monthly allowance.”

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Cell Phone Providers Dirty Little Secret:  Cashing in on SMS Text Messages

If this sounds like a deal, consider this: over the past three years, text messaging in the U.S. has grown tenfold. This means that even typical growth amounts to a fivefold increase in text messaging revenue for cell phone carriers such as T-Mobile, which claims that its average revenue per text message has declined by more than 50 percent since 2005. What T-Mobile and other major carries have neglected to tell the public is that it costs very (very) little to transmit a text message with a 160 character limit. In fact, text messages are considered “free-riders”, meaning that they are tucked into a control channel – space reserved for operation of a wireless network. Carriers can transmit hundreds of millions of messages for as little as $100 per terabyte. A terabyte basically amounts to 1,024 gigabytes or half of the content of an academic research library.

While the cost for the centralized storage equipment is one of the biggest investments for carriers, the cost for storing a terabyte is on the decline and the costs for the staff that’s needed to maintain the equipment is pretty much covered. Simply put, it doesn’t cost carriers more money to maintain a higher volume. As volume increases, the miniscule overhead costs remain the same. The only thing that increases is revenue.

Put another way, delivering that text message to your friend costs your cell phone carrier almost nothing, while it costs you as much as 10 cents each time you press send, and is about to cost you twice as much, at 20 cents per, even though the carrier’s cost of almost $0 hasn’t changed.
Even if you are paying a flat fee of $15-$20 per month for unlimited text messaging, that’s almost all pure profit for your carrier.

  
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Cell Phone Providers Dirty Little Secret:  Cashing in on SMS Text Messages

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2 Replies to “Cell Phone Providers Dirty Little Secret: Cashing in on SMS Text Messages”

  1. Interesting speeches with just enough technical data to lure the layman into believing it must be a conspiracy. The truth of the matter is that most companies DON’T want you to pay 0.20 for a SMS overage charge.
    Just to pick on one carrier, T-Mobile does indeed charge 0.20 for an overage SMS but there is an unlimited per line charge of 10.00 or unlimited per family charge of 20.00.
    Since a teenager can easily send 10,000 SMS per month (and yes I know for a fact – I have two teens)this reduces the price to less than one tenth of one cent PER TEXT!
    I don’t deny that the companies are trying to make money, after all we live in a free market society. When you think about the expenses of running one of these companies (infrastructure, expansion, research and developement, free phones (because people think they have a right to a 300.00 Blackberry because they are a customer), pointless free phone exchanges for a “defective” phone because the user doesn’t know how to use it.

  2. While the bandwidth margin for SMS text messaging is indeed almost infinite (because it is bandwidth that is deployed as part of the regular calling infrastructure) there is a much more complex cost basis for SMS, because it requires that the switching infrastructure can handle all those essentially null calls. Because the phone system (even the mobile phone system) is still circuit-switched at the edges, a growth in SMS that outpaces normal calls can overwhelm systems that were designed to handle a few long-duration calls per day per phone. If you land in an overloaded location (like an airport having weather issues) you can experience such overloading as difficulties getting both SMS and regular calls through. This is a reality *today*, and is ultimately bottlenecked by the radio spectrum available for each carrier in each location. A carrier can’t just stack more cells into a limited high-use area to handle more calls/messages because they only have so much spectrum to use.

    Of course, that’s really hypothetical for now. carriers are not charging absurdly high prices because they need to keep a lid on demand and/or build out denser infrastructure and/or buy more spectrum, they are doing it because the market will bear their prices, and they have created an oligopoly to prevent real competition. Until there’s some alternative to SMS that can be provided ubiquitously by companies who have not invested billions on spectrum and infrastructure, the phone carriers will have no problem charging whatever they can get people to pay for messages.

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