Monday, 29 December 2008

What the cell phone companies don't tell you about texts

It's no surprise that text bundles are so popular for them to do. Texts are effectively free for them:

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.

So, to all intents and purposes, a text message is a free rider for the cell phone company. They're making massive amounts of profit, practically all the costs stem from the effort of billing you, rather than from the business of shifting the text around!

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.

I'm interested whether any GSM phone company is prepared to fisk this. And while I'm all for companies making a healthy profit, the idea of them using assymetrical information by collusion to fuck over consumers doesn't sit well with me.


AntiCitizenOne said...

Does the fixed cost/ variable cost profit structure REALLY matter to consumers?

Text messaging is FREE (as long as you build a multi billion GSM/3G network) should only fly with ignorant leftists.

As always the best way to align costs with prices is competition.

Obnoxio The Clown said...

I don't have a problem with businesses making unexpected profits, I mean, let's face it: texts are a fantastic benefit to consumers.

I find the collusion between industry players to hide the costs from consumers the worrying aspect of this tale.

But yes, more competition is the fix.

John Pickworth said...

At the outset of the mobile phone industry; only two country's consumers really took to the sms service... the UK and Japan. In most others, it was often ignored, the USA even ran campaigns to encourage its use in a populus raised with a permanent ear welded to a phone.

Consequently, most sms services were FREE in the early days across much of the world.

Of course, things have changed and now most of the world is happy to send their friends a short message. Not surprisingly the phone companies are charging for it too.

However while Japan kept prices high, they replaced sms with their DoCoMo services (an early 3G, value added, bells and whistles thing). In the UK we got shafted with the basic offering but still premium prices. Europe and latterly the US have followed our model.

The rest of the world? They moved from free to extremely cheap sms. Malaysia, for example, charges the equivalent of just 1 UK penny a text (5 sens local).

If they (and others) can change such a low rate, why can't a larger (and arguably more competitive) country?

There's something really wrong with this industry. They seem geared to offering more for MORE, rather than honest competition which should deliver more for LESS.

it's either banned or compulsory said...

I was vaguely aware of this and have no problem with it.
For one reason or another my mobile calls are pretty well free though my rare texts do cost 10 or 20p each.
I'm happy enough with that.