June 10, 2011

The dumbest $20 billion profit industry

From the WSJ:
By ANTON TROIANOVSKI 
Growth in the volume of text messaging is slowing sharply, just as new threats emerge to that lucrative source of wireless carrier profits. ...
The new messaging tools—answers to Research In Motion Ltd.'s popular BlackBerry Messenger—are a growing threat to a texting business that generated $25 billion in revenue in the U.S. and Canada last year. 
Carriers, such as AT&T Inc. and Verizon Wireless, charge fees ranging from 20 cents per text to $20 a month for unlimited texting. The texting business has low costs and high margins. A dollar of texting revenue produces at least 80 cents of profit compared with about 35 cents of profit from $1 in wireless data or voice services, according to analysts at UBS.

So, the phone companies make $20 billion in profits on $25 billion in texting revenues? It's a good thing that the Sierra Club and the NAACP are lobbying to let AT&T merge with T-Mobile to alleviate some of this cut-throat competition. My question, though, is: How can phone companies possibly be spending $5 billion per year to carry text messages? How much incremental bandwidth does sending 160 character ASCII text messages use on top of voice and, for a lot of people, video? One percent?

What's the next hi-tech cutting edge communications breakthrough after the great leap forward to texting? Perhaps by this time next year, all the tipping point trendsetters will be tapping out their messages in Morse Code? Or with texting while driving being increasingly banned, perhaps drivers will fill their backseats with smoldering green leaves and open and close their sunroofs to send smoke signals?

44 comments:

Anonymous said...

LOL. ROTFLMAO.

a reader said...

"With texting while driving being increasingly banned, perhaps drivers will fill their backseats with smoldering green leaves and open and close their sunroofs to send smoke signals?"

I was going to call you ubernerd for the dorky joke then thought better of it knowing that last paragraph will be revised by tomorrow.

Feel free to delete this reference to it as if it never happened.

Whiskey said...

The 80% Profit Margin (good call Steve I saw that one too) is for billing. A text message is received. It has to be logged, for billing purposes. You send a text, you're charged for it. You get one, you're charged for it. Often different rates. That has to be tracked. Then a statement prepared, mailed or e-mailed out, payment received etc.

This is why I don't text. If I want to call someone, I'll call them. If I want to email them, I'll email em. I don't want a smartphone either. Its a bastard compromise between a laptop and a phone. I'm on T-Mobile. I dread AT&T.

Anonymous said...

in my experience a lot of people are just using gchat now that phones can handle it

Anonymous said...

wtf

Anonymous said...

;)

Lugash said...

I am Lugash

Apparently it doesn't cost anything to send a text; the messages are sent in blank space of the control channel:

http://mobile.slashdot.org/story/08/12/28/079254/What-Carriers-Dont-Want-You-To-Know-About-Texting

I am Lugash

RandyB said...

I never understood why texting was the latest fad, either.

It should have been the next thing invented after Morse Code.

bjddubbsss said...

What's the cost of a text? Why only look at the incremental cost? Companies don't price based on marginal cost, so I don't see the relevance. That's the same sort of argument being used in the interchange debate, it's misleading and anti-business. Big fixed cost investments are always going to be vulnerable to demagogues counting somebody else's money.

eh said...

I would not call huge margins/low overhead 'dumb' -- it's closer to genius.

Anonymous said...

NExt? The Pendulum swings. The next stage is Text-Plus, enabling use of color, bold, italics, underlining, and smilies. Uses a little more bandwidth, but not much.
--Discordiax

Thomas JJ said...

Fantastic for the business owners- it costs nearly nothing to produce the text product, little in the way of warehouse space required, only a moderate amount of staff in the brick-and-mortar facilities, your customer base is the highly sought after young crowd, many of the users are uneducated and inexperienced and willing to pay considerable amounts of money on social status building.

Oliver M said...

Part of the 20% may be costs of providing phones/Blackberries at a discounted price to people who sign up for the calling/texting services. They also have to pay rent for the shops, and pay for some phone reps to sign people up and manage customer problems.

Steve Sailer said...

Right, the $5 billion probably includes all the marketing and a share of the brick-and-mortar outlets.

The cost of sending text messages is close to nil.

I remember I used to have a plan where I could send all the pictures I took on the camera phone for free but text messages cost a dime each. I remember reading about a high school football quarterback (Dane Crist, now at Notre Dame) who got 900 text messages from Div I head coaches the first month he was eligible to be recruited. He politely sent "Thanks" back to each one -- and got a bill for $90.

Anonymous said...

As hands free becomes more of a requirement in states due to new laws, I see the perfection of voice-to-text and text-to-voice becoming a necessity. People will still text or check their email in meetings or classrooms when they are bored, but to legally multitask in the car some technology advancements will have to happen. I still don't know how companies are going to handle the ever increasing demands for bandwidth, since they typically are loath to actually invest in infrastructure. Much easier to soak customers on high margin features. The same is true of cable companies, which I expect to see eventually merger with telecom as 4G and beyond (slowly) becomes offered by both.

Anonymous said...

yeah, google voice sms set up on android cost nothing. that is what i use..
i am tech guy but i have a super cheap set up:
android, tmobile pay as you go, and i only use the internetz part at home or in free wifi zones which are all over the place now, at least in NYC

Hacienda said...

Whiskey, ever hear about databases? Or do you have a picture in your head of millions of Indians in tidy rows logging in all the world's texting?

-----------

I'm pretty sure 90% of the world's texting is done by teenage girls. I can't account for the other 10%. Al Quedda? Saudi sheiks? 50 year old homosexual or pedo men?

Anonymous said...

Texting has a lot of value to the people who text. Why whine that some of the would-be consumer surplus has become dealer surplus? Society isn't worse off for it.

Anonymous said...

voice-to-text and text-to-voice becoming a necessity.
i am pretty impressed with the tech. with the exception of strange words or names, works pretty well.

stari_momak said...

"It should have been the next thing invented after Morse Code."

It was. Ever hear of an ancient technology called the 'telegraph'?

stari_momak said...

My yahoo mail account can both send and receive texts quite nicely. For free (other than the distracting ads).

Anonymous said...

Their avoidance of reporting facts allows you to correctly fill in the blanks on your own. I read "youths" in a story and can probably guess the rest.

http://www.chicagotribune.com/news/tribnation/chi-when-race-is-mentioned-in-the-chicago-tribune-20110610,0,136289.story

David said...
This comment has been removed by the author.
David said...

>I never understood why texting was the latest fad, either.<

Phone calls are too intrusive and inefficient, and nobody reads email.

Most communications are not deserving of more than 160 characters, anyway. "Pick up milk" "OMG he dated stripper!" "Meeting changed to 1pm"

josh said...

What if a company offered flat out free,unlimited text messaging,as a draw to get their phone??

beowulf said...

"How much incremental bandwidth does sending 160 character ASCII text messages use on top of voice and, for a lot of people, video? One percent?"
Not even that much. So little bandwidth that they could modify equipment to bounce them off meteor trails (seriously).
http://www.itu.int/ITU-D/fg7/case_library/documents/MBC001.html

An 80% gross margin is absurdly high (couple points higher than pharmaceuticals), the govt really should do more to control monopoly pricing.
"Perfecting Imperfect Competition"
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1726683##

Svigor said...

So, put Whiskey's post together with Lugash's post, and the takeaway is that the costs involved in texting are all down to the fact that they charge for it.

USA! USA!! USA!!!

Jack Aubrey said...

"I'm pretty sure 90% of the world's texting is done by teenage girls. I can't account for the other 10%. Al Quedda? Saudi sheiks? 50 year old homosexual or pedo men?

I'm not sure what's meant by calling it "dumb." Are you suggesting that people who use and pay for text messaging services are dumb, or that only teenage girls text?

Because I'm in my early 30s and in my social/family circle texting is now by far the most common method of communicating. It's fast, it can be done almost anytime (even in meetings), it saves purchasing additional voice minutes, and it's a hell of a lot faster than a phone call. What will cut into the profits of phone companies is the widespread adoption of other forms of texting from which phone companies don't get a cut. Since data services are also a profit center, and since more and more people are getting smartphones, and since text messages eat up very little bandwidth, these profits will dry up very, very soon.

For work purposes texting is also a great CYA - a soft copy of an agreement made with a boss or colleague. You can get that through email, too, but not through voice.

Sideways said...

AFAIK, "texting" here isn't just SMS, it's also MMS, which carries media.

Benny said...

What's funny is that Steve Jobs didn't even tell the carriers about iMessage (Apple's new free iPhone-to-iPhone SMS service) before it was released. The carriers used to have the whip-hand over the phone-makers. it's like Apple have just taken 10 billion from the carriers pockets, and burned it in front of them.

Anthony said...

Texts are useful where either it's nice to have the text (an address, say) or it's a short message where it's simpler to text than call (esp. where someone might not check their e-mail for awhile, but usually get texts right away).

JermiahJohnbalaya said...

I am Lugash

Apparently it doesn't cost anything to send a text; the messages are sent in blank space of the control channel:

http://mobile.slashdot.org/story/08/12/28/079254/What-Carriers-Dont-Want-You-To-Know-About-Texting

I am Lugash

That article only deals w/ the air interface. Text messages were originally (***) carried end-to-end in the signalling (SS7) network. About 10 years ago, I was a (the?) lead developer of a product that sat at the nexus of over 100 major European and Asian GSM networks. The main original purpose was to facilitate roaming between all the networks. Eventually, it evolved into a product in which the overwhelming amount of its resources went to managing text messages, which were absolutely swamping the SS7 links.

The other interesting thing about texts being in the SS7 ... the 1994 telecom act was supposed to put up barriers to charging for signalling, as part of the process of breaking up the LEC monopolies. I have a vague memory of randmonly meeting, and explaing the specifics of the technology to, a lawyer who was working on some such case in DC.

(*** not sure what the main method of transport is now, but I'd be really surprised if it doesn't involved the letters "I" and "P")

Anonymous said...

It's patently obvious to anyone in tech that ultimately all that SMS stuff will go over IP, and you don't need a phone company for that.

On an unrelated topic, there was some speculation in the comments earlier about whether Weiner was on 'roids. His office put out a statement today:

"Congressman Weiner... has determined that he needs this time to get healthy and make the best decision possible for himself, his family and his constituents"

Healthy? He looked like he was in suspiciously good shape. Maybe this is a sotto voice way of saying he was geared up.

Anonymous said...

"What if a company offered flat out free,unlimited text messaging,as a draw to get their phone??"

Sprint's "everything" data plans include free unlimited text messaging. Of course, at that point you're paying a large (but fixed) monthly bill, plus you have to have a smart phone. So, unlimited "free" texting is available, if you are already a high end customer.

Also you have it backwards; cell carriers are not interested in a "draw" to get customers to buy a phone; they want customers to buy their phone as a "draw" to get them to sign two year contracts so that they can make money off of monthly service charges. The phone isn't where the carriers make their money; the monthly bill and two year service contract are where they make their money.

jody said...

20 billion? that's less money than carlos slim made, personally, in the last year, by having (among other things) a monopoly on the crappy mexican telephone infrastructure. think AT & T has a good profit margin? think again.

every infrastructure industry in mexico is crappy, of course. lower tech levels, worse maintenance, slower contruction, slower repair, less competition (if any), et cetera.

i don't know if this is true anymore, but back when i used to go into mexico a couple times a year (not in the tourist areas), if you take your US cell phone, you cannot call out of mexico, but somebody in the US can call in to you?

that's because the US phone companies knew they often couldn't get their billed fees from mexico. but mexico knows it can bill the US company and they'll pay.

David said...

This post wins the "Most Likely to Be Spammed in the Comments" Award. Did I tell you about the great new plan XYZ is offering. First 100 minutes are free with first-time activation, man.

CJ said...

Phone calls are too intrusive and inefficient, and nobody reads email.

David is right. I'm pushing 60 and I just started texting last year. Now I do it regularly for work and semi-regularly for social purposes. It combines the advantages of e-mail and mobility. Ask yourself this -- would you rather be in a room full of people texting or a room full of people talking on cellphones?

Anonymous said...

Lots of businesses have high fixed costs and low marginal costs: software, semiconductors, pharmaceuticals.

If you think the profit margins are too high, make a competing product, as a 1001 startups + Apple and Google are doing.

But don't get "the government" involved.

klaos said...

even worse, now people txt msg on those stupid touchscreen devices.

Anonymous said...

By the time you dialed a number and listened to the phone ring a couple times, I already sent off a text explaining everything that phone call was about. I didn't have to deal with crappy reception causing the sound to cut out and I didn't bother you.

So, yeah, texting sucks! It just does everything more efficiently.

JSM said...

"David is right. I'm pushing 60 and I just started texting last year. Now I do it regularly for work and semi-regularly for social purposes. It combines the advantages of e-mail and mobility. Ask yourself this -- would you rather be in a room full of people texting or a room full of people talking on cellphones?"

Ditto that.

Texting capabilities lack one, very necessary thing. Some sort of preprogrammed "I'm driving now. Will read your text and answer you in a bit" message that can be sent back to the person who just texted you. It needs to be done easily, with a large, easy to see and feel, button on the outside of the phone you just push, so you don't even have to look at your phone.

How is it that the monumental stupidity arose that this is not already available?

NOTA said...

Texting is a very nice way to communicate with someone without disrupting the people around either you or them. It's also a nice way to coordinate some small thing--I'm much happier getting a text of the five things my wife wants from the store than having her call me (so I can write down the list)--the text is both less intrusive and more useful.

Eric said...

I work in the business. bjddubbsss is absolutely on target. Sure, the incremental cost for text messaging is very low. But my employer spent many billions buying spectrum, many more billions building out infrastructure, and yet more billions maintaining it through floods, fires, hurricanes, and cousin Eddie's drunken vehicular encounter with the antenna serving your neighborhood.

The incremental cost of an appendectomy is pretty low, too. You have a couple people cutting and blotting and stitching for, what, a half hour? I can spend $35 to have a couple of guys mow my lawn for a whole hour. Why should an appendectomy cost more than that?

David said...

Is texting Aspergery? Maybe shy people hide behind it, but most texters seem motivated by efficiency and a notion of politeness.

Texting increases the pleasure of personal phone calls - by, not coincidentally, reducing their frequency. Once you go mostly text, such phone calls become not more than special occasions for chatting at leisure in lieu of a visit.

The downside to texting is developing the patience to press all those little buttons. But it's merely an issue of technic. As with any simple skill, one acquires it in decent time with practice. Some people can press 'em unnecessarily fast. Some of us are lucky to type 15 characters per minute.