Profitability of Text Messaging

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December 28, 2008
New York Times

What Carriers Aren’t Eager to Tell You About Texting

TEXT messaging is a wonderful business to be in: about 2.5 trillion messages will have been sent from cellphones worldwide this year. The public assumes that the wireless carriers’ costs are far higher than they actually are, and profit margins are concealed by a heavy curtain.

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&TSprint 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.

The written responses to Senator Kohl from AT&T, Sprint and T-Mobile speak at length about pricing plans without getting around to the costs of conveying text messages. My attempts to speak with representatives of all three about their costs and pricing were unsuccessful. (Verizon Wireless would not speak with me, either, nor would it allow Mr. Kohl’s office to release publicly its written response.)

The carriers will have other opportunities to tell us more about their pricing decisions: 20 class-action lawsuits have been filed around the country against AT&T and the other carriers, alleging price-fixing for text messaging services. Timothy P. McKone, AT&T’s executive vice president for federal relations, told the senator that the suits had been filed “since your letter was made public” and said that he was “eager to clear up any misunderstanding.”

T-Mobile and AT&T contended in their responses to Mr. Kohl that the pay-per-use price of a message is relatively unimportant because most messaging is done as part of a package. With a $10 or $15 monthly plan for text messaging, customers of T-Mobile, AT&T and Sprint can effectively bring the per-message price down to a penny, if they fully use their monthly allotment.

T-Mobile called Mr. Kohl’s attention to the fact that its “average revenue per text message, which takes into account the revenue for all text messages, has declined by more than 50 percent since 2005.”

This statement seems like good news for customers. But consider what is left out: In the past three years, the volume of text messaging in the United States has grown tenfold, according to CTIA — the Wireless Association, a trade group based in Washington. If T-Mobile enjoyed growth that was typical, its text messaging revenue grew fivefold, even with the steep drop in per-message revenue.

The lucrative nature of that revenue increase cannot be appreciated without doing something that T-Mobile chose not to do, which is to talk about whether its costs rose as the industry’s messaging volume grew tenfold. Mr. Kohl’s letter of inquiry noted that “text messaging files are very small, as the size of text messages are generally limited to 160 characters per message, and therefore cost carriers very little to transmit.”

A better description might be “cost carriers very, very, very little to transmit.”

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.

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.

Randall Stross is an author based in Silicon Valley and a professor of business at San Jose State University. E-mail:

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