Sunday, September 14, 2008

Senator Kohl questions cellular competition

We discuss the competitive nature of the US cell phone and ISP markets. Generally speaking, ISPs and cell phone companies oppose regulation, arguing in favor of private enterprise and competition. Is there competition in these markets? Let's look at text messaging.

In 2005, each US cell phone company charged 10 cents to send or receive a text message. No doubt they had different cost structures and strategies -- you might have expected one of them to cut their price to try to win new customers. Well they did change their prices -- today they are all charging 20 cents.

Do you find that surprising in this competitive marketplace? Do you suppose their costs rose during those years? Its only fair that they cover their costs, right?

Text messages are transmitted in 140 byte (1,120 bit) packets -- 1,120 bits delivered for 20 cents. How much would it cost to deliver a recorded song at that rate?

Let's be conservative and assume the typical song is 2 minutes long. If it were encoded at 256k bits per second, the rate Apple iTunes uses for premium recordings, that would be roughly 30,720,000 bits -- the equivalent of 27,429 text messages. If a music vendor like Apple charged the same rate per bit as a text message vendor, a song would cost around $5,486 to transmit, yet Apple manages to sell and deliver songs, and make a profit at $1.29 per song.

US Senator Herb Kohl (D-WI), chairman of the Senate Antitrust Subcommittee, recently asked the presidents and chief executive officers of the four largest wireless telephone companies to justify their text message rates. In a letter, Senator Kohl requested an explanation from Verizon Wireless, AT&T, Sprint and T-Mobile, which collectively serve more than 90 percent of the nation's cellular phone users.

Do you think the cellular market is competitive? The Internet access market? What do you think Senator Kohl is planning to do?

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Update 3/13/2015

WhatsApp reports that it now has 700 million monthly active users sending 30 billion messages a day. For comparison, the global SMS system sees about 20 billion messages a day.


Here is the decline of SMS in several nations:


Senator Kohl's call for action went nowhere, but he needn't have worried -- no monopoly lasts forever.