I had a hypothesis that text messaging is a huge cash cow for mobile phone carriers; a high-value product with virtually no variable expense.
So I did some homework and found out I was right, and it was even worse than I imagined.
Text Message Pricing
On Verizon, text message pricing is as follows:
$0.20 per text — pay as you go ($0.25 for a picture message)
$5 for 250 texts –$0.02 per text (immediate red flag, the price just dropped 90%!!)
$10 for 500 texts — $0.02 per text … ok no price break there
$20 for 5000 texts — $0.004 per text (4/10ths of a cent)
Also note: the $10 and $20 plans include unlimited Verizon-to-Verizon texting, but for our purposes we’ll just ignore that.
Basically it’s a shrewd marketing move. Jack up the price of the a la carte texting to make the still-expensive-for-what-you-get plans look like a better deal.
Let’s also assume that Verizon plans on making money even if customers maximize their plan usage. That means Verizon’s marginal cost of delivering a single text message is less than 4/10ths of a cent.
That’s a good starting point, but I wonder how much less their cost really is?
Text Message Bits and Bytes
SMS text messages use 7-bit characters and have a maximum length of 160 characters, making the maximum data size of each SMS 1120 bits, or 140 bytes.
If an average mp3 song from iTunes is 4 MB, a text message is 0.0001335 MB. Almost nothing.
So now we’re down to less than 4/10ths of a cent for 0.0001335 MB, or roughly $30 per MB. How does that compare with the current data plans offered by wireless providers?
- A 200 MB monthly plan for $15 — 200x the data for half the price!
- A 2 GB monthly plan for $25 — 2000x the data for still 17% less!
Now I’m not a cell phone engineer, nor do I play one on TV, but let’s assume that the systems used to transmit wireless data (load web pages, download music, stream online videos) are the same systems used to transmit text messages.
If that is the case (and assuming AT&T still plans to make money on their 2 GB plan), they are openly admitting that their cost to transmit a text message is less than $0.0000016.
2 GB = 2147483648 bytes
Divided by 140 bytes per SMS = 15339169 texts
$25 monthly cost / 15339169 texts = $0.0000016
Let’s go back to Verizon. Assuming they have a similar cost structure to AT&T, their net cost to deliver your 5000 monthly texts is just $0.008, total.
For which they’ll gladly charge you $20 — giving themselves a minimum 99.96% profit margin. Nice!
Text Message Industry
A well-deserved kudos to the cell phone industry for turning SMS messages into an amazingly profitable business. Worldwide, there are 2.4 billion texters sending approx. 550 billion texts per month.
The average global cost of these messages is $0.11, which would make texting a $700 billion a year industry, at virtually no cost to the mobile providers!
Granted, they made big investments in infrastructure to build out their networks, but still.
And I have no problem with these companies making money. In fact, good for them.
As long as customers continue to value the service even at the super-high prices, why not?
But there seems to be a growing sentiment that the pricing and costs may not be aligned; In 2009, Senate hearings took place over antitrust and collusion concerns.
Lower Cost Alternatives
I think the honeymoon may be over for wireless providers and their text message price gouging. Any business with those kinds of margins just begs to be undercut, and several alternatives are already available.
- Republic Wireless has unlimited talk and text plans starting at $15 a month.
- Sprint includes unlimited texting in their data plan, without charging extra.
- Metro PCS and other low-cost providers include unlimited text and data for even less.
- Google Voice and Textfree apps can be set up to send and receive free text messages.