Americans debate collusion in SMS pricing


Posted by Rohan Samarajiva on December 29, 2008  /  0 Comments

Unlike in Asia, the price of an individual SMS has increased by 100% to USD 0.20 in the US.  This has happened at the same time as the mobile market consolidated from six suppliers to four.  Naturally, there has been public-policy concern.  In defense of the telecos, it must be noted that most people in the US do not pay on a per-message basis, but get a “bucket” of services including a large number of SMS for a fixed price, so the per-message price is really not relevant to most people.

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.”

The more important thing is to understand that adequate competition is the key.  It is not as easy as the NYT writer tries to show to calculate the real costs of an SMS.   Much better to create enough competition to preclude collusive behavior.  That will prevent collusive price fixing and high prices.  And will preclude the need for expensive cost studies.

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