If You’re Paying Anything For Text Messaging, You’re Being Ripped Off

Published on December 30th, 2008

Now that’s capitalism and entrepreneurship at its finest. Create a market for something that has nearly 100% profit and make people feel they’re getting a better product if they spend more.

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.
[...]
[T]ext 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.
[...]
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.

On a related note, 42,000 people have been ticketed in California for cell phoning while driving as the new ban on texting while driving is about to take effect.

31 users responded in " If You’re Paying Anything For Text Messaging, You’re Being Ripped Off "

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# 1 bobbo said, on December 30th, 2008 at 5:37 am

I agree. And the difference between this and a paid subscription to JCD is what exactly?????

# 2 Jimbo said, on December 30th, 2008 at 5:46 am

Well duh. 232 bytes, more or less, is a bit less than, say, the amount of data needed to transmit voice, it’s not time sensitive and it doesn’t actually have to go through.

People are foolish. And they have too much money.

# 3 Speedmaster said, on December 30th, 2008 at 5:53 am

I commented on this story at length here. The hand-wringing over this alleged misdeed is I think from a misunderstanding of economics and markets.
http://amateureconblog.blogspot.com/2008/12/cretin-or-crook-sen-herb-kohl-of.html

# 4 bodiddlie said, on December 30th, 2008 at 6:02 am

Perhaps since this was in the NY Times some local news stations will pick this up and get it out to the masses. This, of course, comes as no shock to those of us that understand tech, but most people have no idea how screwed they are getting by their wireless carrier. Between ridiculously long (and expensive to break) contracts, overpriced data plans, and the scam that is text messaging, the average consumer is getting bent over every month.

# 5 Mac Guy said, on December 30th, 2008 at 6:10 am

I have Sprint, and my data plan is an old one they don’t offer anymore. Fortunately, with each phone or plan upgrade, they grandfather my data package in, which includes unlimited data and SMS.

For $10/month.

# 6 brian t said, on December 30th, 2008 at 6:13 am

It’s a little different here in Europe: my cellphone contract (O2 Ireland) isn’t expensive, and includes far more “free” text messages than I can use. I’ve never been charged for receiving messages, even when sent from the USA or UAE, except when “roaming” in other countries.

When I heard about the way it’s done in the USA & Canada, I was like, “no freaking way, dude, that must suck, like, enormously!”

# 7 M0les said, on December 30th, 2008 at 6:20 am

You’re not paying for “bytes” – you’re paying for a service: To get a message to someone in the most “acceptable” form (Whatever your qualifications for that are).

So long as the cost/benefit is acceptable to the consumer, it’s a winner.

Internet email (or IM… or whatever) may usurp SMS as mobile Internet terminals/plans become more attractive on a price/convenience scale.

# 8 bodiddlie said, on December 30th, 2008 at 6:21 am

@speedmaster

Your post says that the price of text messaging is set by supply and demand. I find that argument to be somewhat faulty. The only supply limit here is on the size of an individual text message, which has no bearing on the cost to the user at all. Since these messages are being provided at basically no cost to the carrier, the supply is virtually infinite. An infinite supply would, in theory, drive down the cost of a good, but in this instance has no bearing at all. Demand in this case serves to keep the prices from going up instead of it’s usual effect of increasing prices.

The pricing of text messaging has been arbitrarily set by the wireless carriers and the public has just decided to accept it. The pricing is one of those rare things that exists outside the laws of supply and demand.

That being said, Sen Kohl has no business trying to make this a congressional matter. There is nothing illegal in charging a large amount for something.

# 9 Whoops! said, on December 30th, 2008 at 6:24 am

And sugared water with CO2 named Coke and Pepsi aren’t similar ripoffs? Wait, did I say CO2??? My God! Global warming is caused by soft drinks!

# 10 Jimbo said, on December 30th, 2008 at 6:26 am

Speedmaster, market based pricing is a crock. Tell me which of the services these companies sell unbundled that are BELOW cost. Answer: none, because they won’t do those kind of things. Market based pricing means “we’ll screw our customers out of as much money as we can, but we won’t do the same for our customers.”

It’s very much like laissez-faire government. Companies love it, until it comes time for a bailout.

# 11 Personality said, on December 30th, 2008 at 6:39 am

So will anything come of this? Will companies lower the rates? Will they be fined?

# 12 bobbo said, on December 30th, 2008 at 6:42 am

What have we got here?

A pet rock?
Bottled Water?
All you can eat Sushi Bar?

The “free market” assumes informed buyers and sellers both of whom have ready alternatives. Anything missing element allows for HEAVY REGULATION.

As wireless consumers are by and large ignorant and the providers have secretly agreed to offer a worthless service for the same big bucks (grandfathering being the bright light here more than an exception), sure looks to me like the people should do thru legislation what the market won’t allow by not being free.

# 13 bodiddlie said, on December 30th, 2008 at 6:44 am

@Personality

I don’t think anything will come of this at all. There’s nothing illegal being done, so no fines. There’s no incentive to lower the rates unless the masses wake up and cancel their texting plans and demand lower prices. If they charge $20/month for unlimited texts, and decide to cut the price to $10/month, they would need to double the subscribers in order to make back the loss in revenue since there is no change in costs associated with the price cut. No sane company would do that (nor should they).

Tell everyone you know to cancel their text plan and demand lower prices, and then maybe we’ll see something. We have to vote with our dollar here.

# 14 Olo Baggins of Bywater said, on December 30th, 2008 at 6:51 am

#11…nope. Most of us will have forgotten this by tomorrow.

# 15 Improbus said, on December 30th, 2008 at 7:12 am

I hate texting I wish people would stop sending me messages.

# 16 orangetiki said, on December 30th, 2008 at 7:12 am

Well until a cell phone carrier comes in offering it for less, the prices will stay the same. It’s the great fault of capitalism. Why give it away for free when you can charge the bejesus out of it?

# 17 pedro said, on December 30th, 2008 at 7:34 am

The whole cell phone industry pricing is a scam, not just sms’.

Yet, there are people here that think MS (or anyone else for that matter) won;t get away with that cloud pay-as-you-go-computing crap.

#7 Oh, a cell phone industry apologist. I wonder where you’d work.

# 18 stopher said, on December 30th, 2008 at 7:46 am

“That being said, Sen Kohl has no business trying to make this a congressional matter. There is nothing illegal in charging a large amount for something.”
The illegality comes in the form of oligopolistic price collusion. This is not a free market situation where supply and demand is setting a price.

# 19 Dallas said, on December 30th, 2008 at 8:02 am

Yep. That cellular sideband channel is a huge profit maker.

Fortunately, my company pays for my ATT cellular oriented charges but my partner pays that obscene $20/mo. We are huge texting users.

I can only see texting getting bigger as location based services will mostly rely on getting presence updates from that same channel. Hopefully the government will watch for price fixing from carriers (now that a government for the people will be coming).

# 20 Thomas said, on December 30th, 2008 at 8:23 am

#3
The analysis of markets and economics provided in your link does not account for all variables in market dynamics. Costs to consumers will be close to production costs when competition is high. However, if competition is limited, there is a tendency for collusion amongst competitors to keep prices artificially high. That is what is happening here. Consumers are being gouged because there is insufficient competition in the marketplace to prevent it. Perhaps you might want to consider statements from Harvard MBA about economics and markets more carefully before dismissing them.

As post #18 said, this is a matter of interstate commerce if you have an industry colluding to set prices.

# 21 LibertyLover said, on December 30th, 2008 at 8:39 am

It’s a service, one you don’t have to use if you don’t want to. And if even if there was NO cost to maintain it, does that mean it should be free?

People think it’s the US carriers making the money?

Canada is way more profitable at 45.9% vs. the US at 32.1%.

The most profitable telecommunications company in the world was Telecom New Zealand, with a margin of 61.4 per cent.

So, before you start bashing US telecom companies for being greedy, think about this. The 90% profit margin for SMS is keeping the US companies at the global average profit. With all the regulations imposed on the cell phone companies, they have to turn a profit somewhere.

# 22 bobbo said, on December 30th, 2008 at 8:48 am

#21–LL==whats more important to a society: having multiple successful cell phone companies or having a society with cheap effective widespread accessible communication network?

Or should both interests be taken into account with perhaps a bias one way or the other?

Silly to think society should be arranged for only a few to make big bucks off the backs of the many. Equally silly to think the leading edge of technology can be divined by government. Good thing there is a lot of slop in between unless you imagine yourself to be an entrepreneur.

# 23 Bob said, on December 30th, 2008 at 8:51 am

Yeah, and let’s get after those software companies next! The marginal cost for the next copy of software is basically zero, so they should just give it away. /sarcasm

# 24 Greg Allen said, on December 30th, 2008 at 9:22 am

OK, the bandwidth may be free but it’s still a service I am willing to pay for — not a lot, but something.

# 25 Mac Guy said, on December 30th, 2008 at 9:26 am

#7 – Highly unlikely that these terminals would replace SMS. Why should I seek out a terminal when I have one at my hip or in my pocket? (out of curiosity, is your name an Electric Dreams reference?)

#8 – Despite the fact that I am a free market Republican, I think that it’s acceptable for Congress to step in occasionally to help the little guy when he’s getting pinched by big corporations. They do it all the time.

#11 – Nothing will come of it.

#13 – The first carrier to cheaply do this will more than make up their “losses” when customers flock their way.

It’s an older (and outdated) way of doing business. Same mindset as the RIAA: “If you’re not paying for it, you can’t have it, and we hate you for it.” What they fail to realize is that there’s an even older business concept: lure customers in by giving some things away for free, then nail them with other charges.

# 26 Mr. Fusion said, on December 30th, 2008 at 10:11 am

First, this is a service. If you take it and use it you know what the cost is.

Second, there is nothing wrong with the government looking at cell phone charges. If the providers are colluding on charges it is the government’s responsibility to investigate and protect the consumer.

Third, I expect the government to regulate the market place when the competition has been reduced to a few major players that practice unfair practices. In short, read your dispute mechanism in your contract.

# 27 Dave W said, on December 30th, 2008 at 10:15 am

I have never sent a text message. I refuse to read those sent to me. The whole concept seems entirely suited to the 15 year old set.

Silly me, I think telephones are for talking, and I’ll go one further…I think cell phones are for when I’m not in reach of a land line. As far as it goes, I don’t really care to talk on the phone unless I have something to say or want to hear what the other party has to say. 90% of telephone usage these days seems to be complete rubbish.

Now, once again, I WOULD like to get a cell phone with decent fidelity and service. But I gave up holding my breath on that decades ago.

# 28 ECA said, on December 30th, 2008 at 12:52 pm

Who remembers when TXT message pagers were the NEET thing. Better then PAGERS and LESS expensive then a cell phone.. And some of the PACKAGES to ADD Txting are STUPID.
This is NOTHING compared to ADDING Internet, EMAIL, and sending/receive PICTURES..WHICH ADDS LOTS of money to someones POCKET.
Im waiting for a SOLID Bandwidth charge. NOTHING ELSE. If you consider that Digital Phones Compared to analog. It like an MP3 of a RECORD/CD. VERY compressed and it dont SOUND the SAME.

# 29 Glenn E. said, on December 30th, 2008 at 1:52 pm

Yeah, and they charge for the Call ID service, which is code sent between rings, and is on the computers whether it’s used or not. The taxpayers funded the 9-1-1 service that made it possible. But you have to pay for any private use of the info. Like whether its a friend calling you, or some telemarketing scam artists.

The Touch Tone technology was another phone company scam. It saved them billions, over the older pulse code technology. But rather than use the money they saved to replace the older circuits. They charged everyone for the Touch Tone upgrade. And used the money to keep the pulse code system going (actually made it solid state), to act as a form of punishment of NOT upgrading. In my area, we had pulse for the longest time. Than it became Touch Tone, without any notice or fee. And then one day it became pulse dial again, for a time. Then mandatory Touch Tone, with a fee increase. We never asked for it, it was forced on us. And yet the system responds to either kind of dialer. So why the HELL didn’t we get a rate reduction for technology that saved the phone company from getting mechanical relays in use?

# 30 ECA said, on December 30th, 2008 at 5:06 pm

You would think,
That the PHONE company would allow BASIC TECH that has been used for the last 20+ years to become STANDARD..Caller ID, Call forwarding, and so forth.
BUT, I BET you do not realize HOW many relay stations HAVENT been updated/upgraded in over 20-30 years.

# 31 ECA said, on December 30th, 2008 at 8:06 pm

Phone Company..
Gets your money NO matter if you use it or NOT.

Bill $28.83
res line $19.75
911/Fed Univ Serv Fund/Fed Excise/State univ serv fund/Tele Assistance prog/Federal Access Charge $9.08
ANd is going up ANOTHER $3-4 NEXT month..

I would figure that about 1/2 is profit to go into Expansion.. WHERE??
Even if its only 1/4. ALL the people in the USA paying into Expansion..(about $5 per person with a LAND LINE) every month they are getting enough money to install FIBER.
estimate 150,000,000 HOME lines, and 2 times that for Business(every business needs 2 or more LAND lines(cc card machines, fax,..)) 450,000,000 total lines times $5.
$2,250,000,000 per month??
This over 4 Corps??
4 corps that cant figure out WHO owns WHOM?? Parts break off and buy up the MOTHER company, then change their name and Buy up another company then SELL themselves off, to be bought up buy the other Company.

And for MOSt of you that DONT understand..
YOUR CELLPHONE USES PHONE LINES.
There IS NO WIRELESS BACKBONE across this nation.

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