Sunday, September 12, 2010

The cost of differentiated services

We have seen ways in which the information-service business model is enriching cable and telephone companies at our expense.  Charges for text messaging might be the most egregious example of a service that is priced much higher than its cost in spite of supposed competition among cell phone companies.

The author of a recent New York Times article calculates that at 20 cents per text message, cell phone companies are charging $1,498 to transfer one megabyte of data.

But, if you send a lot of text messages, you would probably switch from a metered plan to an unlimited plan, which is typically $20 per month.  We average about 500 text messages a month, according to Nielsen, the media measurement firm.  A $20 unlimited plan would drop the price of a text message to 4 cents, or $300 a megabyte.  Nielsen says teeneagers average about 104 messages a day. That drops the charge to "only" $47.62 a megabyte on a $20 unlimited plan.

Contrast these prices with Apple's music distribution, which uses the vanilla Internet.  Apple sells a song for $1.29.  If they had to pay $47.62 per megabyte to transmit that song to the user, it would cost them about $180 per song.  At 20 cents per message, it would cost Apple $5,486 per song.

If you read the New York Times article, you will also see that the cell companies are moving traffic from the cellular network to WiFi -- the same thing we consumers are doing.