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Bit Players
-- By ZachMW - 07 Nov 2011
Golden silence
The silence is not a dropped call. Rather, it is the denial of AT&T to discuss the economic forecast for text messaging with a reporter from The New York Times. AT&T has reason to keep quiet: The present is profitable, the future is cloudy, and the numbers are difficult to comprehend.
Professor Srinivasan Keshar at the University of Waterloo estimates that while it costs wireless operators 1/3 of a penny to send a text message, they charge customers 10 to 20 cents for each text message sent and received – a markup of 4,090 percent. With some two-trillion text messages sent in the U.S. each year, representing $20 billion in revenue for the wireless industry, this is a lot of money not to want to talk about.
Moreover, this is an amount of money that the savvy consumer – perhaps soon to be the modern consumer – need not spend. When the same short messages are sent over data networks and the Internet, as opposed to through the control channel of cellular networks, the cost plummets: “At 20 cents and 160 characters per message, wireless customers are paying roughly $1,500 to send a megabyte of text traffic over the cell network. By comparison, the cost to send that same amount of data using a $25-a-month, two-gigabyte data plan works out to 1.25 cents.”
Silence is the sound of the status quo, and the status quo is profitable for wireless carriers. However, this silence is being interrupted by the beeps, chimes, and vibrations of applications such as iMessage, TextPlus? , WhatsApp? , Kik, and other services offering wireless customers free texting over data plans. As such, these services present a mortal threat to telecom’s $20 billion text message industry, which is counting on consumer inertia to keep the coffers open. Because in the smartphone era, there is no longer any reason for wireless communicators to indulge in the luxury of buying and sending cellular text messages. Yet instead of immediately canceling their cellular text messaging plans, consumers may be upgrading them.
This August, AT&T announced the end of its lower-tier text messaging plan, which charged $10 a month for 1,000 text messages. In its place, new consumers will have the choice of spending $20 a month for unlimited texting, or paying 20 cents for each individual text. This business model effectively assumes that, for the time being, all diners at the text message delicatessen will agree to appease all-you-can-eat sized appetites, even if in the near future their hunger for cellular texting will be satiated completely. Until consumers push back from the table, however, they will have no meaningful alternative to over-abundance. Pursuant to the pricing strategies of the wireless carriers, the world of cellular texting will end with a bang, not a whimper.
You’ll still need data
While AT&T declined to discuss the changing paradigm of text messaging, a spokesperson for Verizon Wireless pointed to the silver lining for wireless carriers: If cellular text messaging declines or ultimately disappears, consumers will be rendered more dependent than ever on their data plans.
“From a business perspective, customers still need a data plan to connect to a device,” said spokesperson Brenda Raney. “They are only making choices on how they are using that data.”
Indeed, the choices for data usage are all-encompassing: email, text message, mobile applications, even digital voice communication through VoIP? . It is this arena, then, rather than text messaging, that would seem the obvious choice for wireless carriers to offer unlimited plans. But to the contrary, carriers are getting rid of them.
AT&T and Verizon recently replaced their unlimited data plans with tiered plans. AT&T offers a two-gigabyte plan for $25 a month, and Verizon offers two, five, and 10 gigabyte plans that cost as much as $80 per month. Both companies charge an additional $10 for an extra gigabyte of data when customers exceed their tiered limit.
This pricing regime is ironic when juxtaposed against the unlimited plans for text messaging. In the first instance, the wireless companies are saying, as consumers require this service less, we’ll charge them for an unlimited supply. In the second instance, with data allocations more useful than ever, wireless carriers are replacing unlimited plans with measured limits.
The rationale of the wireless companies is that they have to take protective measures to prevent their networks from becoming overburdened. AT&T already expects to carry “more data in the first two months of 2015 than in all of 2010.” This estimate is based on the increasing ubiquity of smartphones, the increasing number of data-consuming applications, and the increasing utilization of 4G networks. Accordingly, the wireless carriers explain that they are factoring the public interest into their price plans. If we don’t compel consumers to put on the breaks, the theory goes, then everyone will drive full-speed into the tech tunnel, causing a massive, multi-million user pile-up. Good luck downloading Angry Birds in that Internet society.
Bit players
This might be a convincing argument – unless you have it on good authority that there is no money to be made moving bits in the 21st century. Consequently, when moving bits becomes a wholesale business venture, what will happen to wholesalers who currently charge retail prices?
AT&T first foresaw and attempted to forestall this problem by locking the highly-coveted iPhone to its network, thereby creating a profit-rich bottleneck. But in February 2011, a CDMA version of the iPhone 4 launched for Verizon, and even Sprint and C Spire Wireless are now carrying the iPhone 4S.
The upshot, then, is that the bottleneck has been replaced by several straws. Further, AT&T and Verizon may prove susceptible to the lean and hungry wholesaler who finds it in her interest to offer unlimited data to retail customers at wholesale prices. And if you believe what you see on TV, Sprint may be auditioning for this very role.
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