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.

Television: single service; Internet: multiple services

In a recent post, we spoke of the ISP's service-oriented business model, contrasting it with the unfettered delivery of information (bits) on the Internet.

As an example, we cited the NBA playoff games being streamed over the Internet as well as broadcast on television. We noted that the service-oriented business model maximized carrier profit at the expense of consumers and the national economy.

In addition to being economically efficient, the Internet allows us to combine the game coverage with services like the LA Times chat room shown here:

This and other services like providing expert commentary, statistics, alternative play-by-play reporting, supplementary video, etc. would add to the viewer experience and create an online community of fans.

Would you enjoy chatting with other fans while watching a sporting event? Would you rather watch a sporting event on broadcast television or your computer screen? Which would you prefer if the Internet speed increased to the point where it could match the size and resolution of your television set?

The information-service business model is costing us dearly

The incumbent Internet service providers have a service-based business model, differentiating between Internet, telephone, text-message, basic television, premium television, voicemail and other services.

This enables them to vary prices to maximize their profit and discourage competition. For example, they charge exorbitant fees for text messages and discourage Internet video by charging extreme prices when download caps are exceeded.

This differentiation between types of data or service is arbitrary. It is all bits.

For example, the NBA playoff game on Sunday was televised and streamed over the Internet. Both came over the same cable:



As we see, the television coverage, including the ads, is being delivered over the Internet with a four second delay. The Internet image quality is below that of the television signal, but that will improve when US Internet speeds catch up with the rest of the world.

The incumbent telephone and cable companies profit from their service-oriented business model, so they will resist becoming information utilities, delivering undifferentiated bits.

Can they sustain that position in the long run? Would we tolerate a water company that differentiated between drinking and washing water or a gas company that differentiated between heating and cooking gas?