You see this type of article design pattern frequently: "You are being ripped off - Product A costs Company B a maximum of C Dollars on the margin, and they are charging you D Dollars, which is many orders of magnitude larger than C"
The common rebuttal is:
"You are making the mistake of calculating on the Margin, you forgot to calculate E Fixed Costs"
But, I think of it somewhat differently:
It is rarely the case that you _have_ to use Product A at Price D, but you still do, which means it usually has more value to you than Price D - and is it that unreasonable that Company B should charge it's customers what their customers value product A at?
I know I would.
As a side note - I've managed to get most of the people I SMS with frequently into using WhatsApp, and, once I see that I've sent less than 100 SMS messages for at least three or four months, I'll shift it over to my Data Plan.
Apple will likewise have simliar impacts when they bring their SMS alternative online.
So - the free market does respond to this in a semi predictable and reasonable manner.
I think the real problem here is all the regulatory and financial barriers to competing in the telecomm arena. The free market has a hard time sorting itself out when there are so few players.
I don't have a solution to propose, but this is my observation.
Calculating marginal cost+a portion of fixed cost tells you what it costs the cell carrier. But that's the wrong side of the equation to be looking at.
Mkt transactions happen when the cost of something overlaps with what someone is willing to pay for it.
And exactly how much someone is willing to pay for something is defined as the value of their next best alternative. In the case of texting, it could be the hassle of setting up all their friends WhatsApp, or typing in email addresses into their contact book, or something like that. (Also throw in a wee bit of behavioral economics, time discounting etc ) And that's why you get a bunch of people (myself included) willing to pay the $5 or whatever a month for unlimited SMS.
Also to clarify usually when people try to measure "how much you are getting ripped off" they are looking at the difference between the two sides of the equation above (cost, and price-what you pay) which is not always the best way to do it but it does give some indication of consumer/producer surplus. You might feel like you're getting ripped off but that's a judgment call are you really? You currently pay $5 a month for unlimited but I bet you'd be willing to pay 6 or $ if you had to. So really you are getting a deal, saving yourself at least $2 a month what they could be charging you if they knew your max reserve price.
>The common rebuttal is: "You are making the mistake of calculating on the Margin, you forgot to calculate E Fixed Costs"
An even better rebuttal is: "Price is not: (what it costs) + 1, it is the perceived value of the product/service. Costs have nothing to do with it besides deciding the pricing floor".
This is just repeating the same old crap that is completely devoid of anything but the most abstract high level concepts of how these things work.
I can't claim to be any expert, but I know at least that in GSM a handset must be allocated a dedicated control channel from a limited number of timeslots in the current cell for the duration of an SMS transaction. This happens on the receiving and transmitting ends. In order to establish said channel, the handset is first woken up through paging, which places load on another shared channel.
For each physical frequency, there are only something like 16-24 slots available. For each physical station, there may only be handful of frequencies in use, perhaps only one.
Installation of a base station is not cheap. In a busy metropolitan area with even 100 teenagers getting upset because their SMS failed to go through the first time they tried to send it (and repeatedly pumping send until it finally works), at least make a guess at the math involved for infrastructure costs to support this kind of thing. Don't forget to factor in the load it places on the random paging channels shared with voice signalling (again, more investment in physical frequencies to reduce error rates here).
In short, I wish someone who actually understood this stuff wrote some kind of rebuttal, the rhetoric is clearly at least a few parts bullshit.
Don't try to imagine this using some analogy like tiny UDP packets being spat out on a packet switched network, that's not what these networks look like. Transaction time is on the order of seconds, which requires a "physical" circuit to be setup beforehand.
Yes, sending SMS would be practically free on the Internet, but that's comparing apples to oranges.
The price of what unlimited text messages should cost aside, the ala carte pricing of text messages (at least for US cell carriers) is definitely price gouging. It cost (at least at one point) ~25c to receive a text message. And I have received spam text messages. This creates a perverse incentive to the carrier to do nothing to block spammers on their SMS network.
Also, my wife has a pay-as-you-go plan and each text that she sends or receives counts as a minute of talk time. I have a hard time believing that setting up circuit from one end of the text to the other takes the same amount of resources as a minute of talk time. Shouldn't a minute of talk time also take up a circuit? Wouldn't a text occupy that circuit for a fraction of a minute?
To the consumer cost to the company providing the product/service is irrelevant. What really matters is the value you extract for the price you pay.
Some products need to be sold at a loss for anyone to consider purchasing them, some are sold at a loss to get you to buy other products from the same company, and some are sold with significant margins. None of these situations really matter to the consumer, do they? All that matters is that I'm getting X and am willing to pay Y. If I can pay .5Y, then that's great I just earned myself a deal. I may not want to pay 1.5Y though.
So from a consumer perspective... I don't understand "how badly you're being ripped off". As an entrepreneur though I read that and think, potential opportunity. Any product/service that has extremely large margins has potential for competition and profits. For a short time at least, until the race to zero makes it less compelling to compete any longer.
I agree. Part of the value is that it is a default application in every phone. My previous startup provides an SMS gateway that sending 500K messages each year to mostly SE Asia receivers (small amount compared to what other providers do) Even now although data plans are getting cheaper and more common, there are still a lot people NOT carrying IPhones, Androids, BB etc. If you want a ubiquitous push notification mechanism, SMS is still the only app. And maybe part of the reasons why the author is ranting about this is because when I compare SMS rates across different countries, US users are paying quite a premium for SMS as compared to Asia or SE Asia where I am located.
I'm always amused when tech types (who tend to lean libertarian) act so outraged when something they purchase doesn't correspond to costs + some "fair" markup. (People seem particularly fixated on the prices of ebooks and text messages, for some reason.) Do you want to question the basis of capitalism and the free market? I'm all for it! But if you don't, don't complain when companies charge what the market will bear. Don't hate the players, hate the game.
I think the objection here is to the cell phone market, which more resembles a cross between an oligopoly and a cartel than a free market. You only have a handful of players and giant barriers to entry, so it's not easy to send a real signal about your unhappiness or choose an alternative.
Not that the telcos aren't plundering the citizens, but the SMS messages do travel in a special channel that let's you get them in a timely manner without killing your battery. It has rather small bandwidth compared to the entire cell, and that scarcity for premium functionality should cost more.
That said, AT&T takes so long to deliver a text between my family that they may as well just poll infrequently in the regular channels.
As a group of software developers, I suspect there won't be much sympathy found here. You shouldn't price at cost+, but rather at value+. Many of us work on SaaS solutions, which have little to no marginal cost, yet we charge for the service.
But what are the fixed costs of SMS? It's traveling over a network that was initially built to carry voice traffic, and is currently expanding to carry data traffic. How much of the network was built specifically for SMS? It really seems like it was something shoehorned into existing infrastructure. I have a hard time coming up with the fixed costs of SMS (at the carrier level; You could always add the cost of phone makers to build in support, but that's not the carrier's job).
I guess it all depends on who you are. Some international carriers I've worked with, handling SMSs is a net loss to them - but they have to do it(as a side offer to gain customers for services they do make money on, mostly voice traffic, and because they're lawfully bound to do it as they're operating a country's international SS7 border gateway).
Also, telco equipment isn't cheap. All those tens of thousands radio towers, exchanges, cables cost arms and legs. They have to make that money somewhere. Though, I've no doubt someone's getting far richer on your SMSs than what would be sensible. Entering this market is a huge barrier - you need expensive equipment, you need licenses, you need interconnection arrangement with other carriers, and you often need to build up a physical network. Thus, few actors and little competition.
Here's btw. a screenshot decoded SMS message captured on a SS7 network for your pleasure :-)
http://imgur.com/E0qKv
I think the main rage people get here is when they get data on their phone and so can make a much more of a "like-for-like" comparison between various means of delivering 132 characters delivered to/from a mobile device.
I mean of the user experience, not of the very different backend networks in place.
the cost of SMS is determined by how much consumers can be persuaded to pay
Correct, that's what happens in a free market. Since when are businesses supposed to price according to the cost of what they are selling? Their job is to make a profit, and the best way to do that is to find the balance between the highest cost and getting as many people as possible to pay that price.
Not to mention that SMS messages being more expensive than they could be is hardly a new fact, and indeed is written about often enough that it has been on HN multiple times in the last year alone.
Did you know that data being sent as a text message is several orders of magnitude more expensive than sending data to the hubble space telescope (about $8 per Mb)?
"prices for individual text messages on pay-as-you-go plans have quadrupled from an average of 5 cents to 20 cents"
Really? In the UK they've stayed static at about 10-12p for at least ten years (for a 'standard' text on a PAYG plan, assuming no extras which give you reduced rates on texts to certain people etc.). We're also not charged for receiving standard texts (there can be a charge for premium ones, but not everyone can send those).
Who pays by the text? Don't most plans include a large number of free SMS messages?
Besides, this guy's analysis is very flawed. For one thing, SMS messages don't take the same path as data. They can't, since so many people (still) don't have smart phones. Also, the idea that because one kilobyte costs x that one byte ought to cost x/1024 completely ignores setup and fixed costs.
What are the fixed costs for SMS? Aren't they using infrastructure that was setup for the voice network? Can you really call the cost of setting up a new cell tower a 'fixed cost' of SMS (i.e. doesn't it also carry data and voice)?
A deep problem seems to be a high barrier-to-entry for would-be competing carriers. If it was easy to start a business that charged rates people were happier with, someone would do it, and make a good deal of money. As things currently are, there's no real incentive for carriers to change -- they get away with it because consumers don't have a choice.
That barrier is impossibly high, at least in the US, because there's a constrained resource involved: spectrum. I suspect it's quite literally impossible to start a nationwide carrier at this point without congressional action to reallocate frequency bands from some other use.
Water bottles are great. Way better than those absurdly overpriced bottles of water!
(Odd how one ordering of the two words seems to imply to me a sort of reusable bottle made of heavy plastic or metal while the other ordering implies those cheap plastic bottles of water that often times cost as much as the reusable ones anyway).
I hate being ripped off just as much as the next guy...
But, I don't think showing the cost of SMS is the right way to fix the market. Guess what, there are a lot of things in this world that you buy with ridiculous mark ups.
Isn't that infuriating? The carrier is literally selling you spam: they charge you to receive that spam message. They could provide a whitelisting service, which would be technically simple to implement and would solve the problem completely. But they have incentive not to.
[+] [-] ghshephard|14 years ago|reply
The common rebuttal is: "You are making the mistake of calculating on the Margin, you forgot to calculate E Fixed Costs"
But, I think of it somewhat differently:
It is rarely the case that you _have_ to use Product A at Price D, but you still do, which means it usually has more value to you than Price D - and is it that unreasonable that Company B should charge it's customers what their customers value product A at?
I know I would.
As a side note - I've managed to get most of the people I SMS with frequently into using WhatsApp, and, once I see that I've sent less than 100 SMS messages for at least three or four months, I'll shift it over to my Data Plan.
Apple will likewise have simliar impacts when they bring their SMS alternative online.
So - the free market does respond to this in a semi predictable and reasonable manner.
[+] [-] burke|14 years ago|reply
I don't have a solution to propose, but this is my observation.
[+] [-] hammock|14 years ago|reply
Calculating marginal cost+a portion of fixed cost tells you what it costs the cell carrier. But that's the wrong side of the equation to be looking at.
Mkt transactions happen when the cost of something overlaps with what someone is willing to pay for it.
And exactly how much someone is willing to pay for something is defined as the value of their next best alternative. In the case of texting, it could be the hassle of setting up all their friends WhatsApp, or typing in email addresses into their contact book, or something like that. (Also throw in a wee bit of behavioral economics, time discounting etc ) And that's why you get a bunch of people (myself included) willing to pay the $5 or whatever a month for unlimited SMS.
Also to clarify usually when people try to measure "how much you are getting ripped off" they are looking at the difference between the two sides of the equation above (cost, and price-what you pay) which is not always the best way to do it but it does give some indication of consumer/producer surplus. You might feel like you're getting ripped off but that's a judgment call are you really? You currently pay $5 a month for unlimited but I bet you'd be willing to pay 6 or $ if you had to. So really you are getting a deal, saving yourself at least $2 a month what they could be charging you if they knew your max reserve price.
[+] [-] danssig|14 years ago|reply
An even better rebuttal is: "Price is not: (what it costs) + 1, it is the perceived value of the product/service. Costs have nothing to do with it besides deciding the pricing floor".
[+] [-] forgotusername|14 years ago|reply
I can't claim to be any expert, but I know at least that in GSM a handset must be allocated a dedicated control channel from a limited number of timeslots in the current cell for the duration of an SMS transaction. This happens on the receiving and transmitting ends. In order to establish said channel, the handset is first woken up through paging, which places load on another shared channel.
For each physical frequency, there are only something like 16-24 slots available. For each physical station, there may only be handful of frequencies in use, perhaps only one.
Installation of a base station is not cheap. In a busy metropolitan area with even 100 teenagers getting upset because their SMS failed to go through the first time they tried to send it (and repeatedly pumping send until it finally works), at least make a guess at the math involved for infrastructure costs to support this kind of thing. Don't forget to factor in the load it places on the random paging channels shared with voice signalling (again, more investment in physical frequencies to reduce error rates here).
In short, I wish someone who actually understood this stuff wrote some kind of rebuttal, the rhetoric is clearly at least a few parts bullshit.
Don't try to imagine this using some analogy like tiny UDP packets being spat out on a packet switched network, that's not what these networks look like. Transaction time is on the order of seconds, which requires a "physical" circuit to be setup beforehand.
Yes, sending SMS would be practically free on the Internet, but that's comparing apples to oranges.
[+] [-] pyre|14 years ago|reply
Also, my wife has a pay-as-you-go plan and each text that she sends or receives counts as a minute of talk time. I have a hard time believing that setting up circuit from one end of the text to the other takes the same amount of resources as a minute of talk time. Shouldn't a minute of talk time also take up a circuit? Wouldn't a text occupy that circuit for a fraction of a minute?
[+] [-] kerryfalk|14 years ago|reply
To the consumer cost to the company providing the product/service is irrelevant. What really matters is the value you extract for the price you pay.
Some products need to be sold at a loss for anyone to consider purchasing them, some are sold at a loss to get you to buy other products from the same company, and some are sold with significant margins. None of these situations really matter to the consumer, do they? All that matters is that I'm getting X and am willing to pay Y. If I can pay .5Y, then that's great I just earned myself a deal. I may not want to pay 1.5Y though.
So from a consumer perspective... I don't understand "how badly you're being ripped off". As an entrepreneur though I read that and think, potential opportunity. Any product/service that has extremely large margins has potential for competition and profits. For a short time at least, until the race to zero makes it less compelling to compete any longer.
[+] [-] kirvyteo|14 years ago|reply
[+] [-] michaelfairley|14 years ago|reply
[+] [-] olihb|14 years ago|reply
People were buying cars before Ford, but more people bought them when they got cheaper.
[+] [-] jfruh|14 years ago|reply
[+] [-] jseliger|14 years ago|reply
[+] [-] jws|14 years ago|reply
That said, AT&T takes so long to deliver a text between my family that they may as well just poll infrequently in the regular channels.
[+] [-] numlocked|14 years ago|reply
[+] [-] pyre|14 years ago|reply
[+] [-] xorglorb|14 years ago|reply
The cost of programmers to create the product, the cost of servers, system admins, etc. Those aren't small costs.
[+] [-] unknown|14 years ago|reply
[deleted]
[+] [-] zobzu|14 years ago|reply
I wonder how much really cost internet data traffic however.
[+] [-] DanI-S|14 years ago|reply
[+] [-] angus77|14 years ago|reply
[+] [-] noselasd|14 years ago|reply
[+] [-] noselasd|14 years ago|reply
Also, telco equipment isn't cheap. All those tens of thousands radio towers, exchanges, cables cost arms and legs. They have to make that money somewhere. Though, I've no doubt someone's getting far richer on your SMSs than what would be sensible. Entering this market is a huge barrier - you need expensive equipment, you need licenses, you need interconnection arrangement with other carriers, and you often need to build up a physical network. Thus, few actors and little competition.
Here's btw. a screenshot decoded SMS message captured on a SS7 network for your pleasure :-) http://imgur.com/E0qKv
[+] [-] bxc|14 years ago|reply
I mean of the user experience, not of the very different backend networks in place.
[+] [-] GrooveStomp|14 years ago|reply
[+] [-] Qz|14 years ago|reply
[+] [-] zobzu|14 years ago|reply
[+] [-] corin_|14 years ago|reply
Not to mention that SMS messages being more expensive than they could be is hardly a new fact, and indeed is written about often enough that it has been on HN multiple times in the last year alone.
[+] [-] lukeschlather|14 years ago|reply
[+] [-] Derbasti|14 years ago|reply
[+] [-] pwaring|14 years ago|reply
Really? In the UK they've stayed static at about 10-12p for at least ten years (for a 'standard' text on a PAYG plan, assuming no extras which give you reduced rates on texts to certain people etc.). We're also not charged for receiving standard texts (there can be a charge for premium ones, but not everyone can send those).
[+] [-] tsotha|14 years ago|reply
Besides, this guy's analysis is very flawed. For one thing, SMS messages don't take the same path as data. They can't, since so many people (still) don't have smart phones. Also, the idea that because one kilobyte costs x that one byte ought to cost x/1024 completely ignores setup and fixed costs.
[+] [-] maxxxxx|14 years ago|reply
[+] [-] pyre|14 years ago|reply
[+] [-] tylerneylon|14 years ago|reply
[+] [-] tsotha|14 years ago|reply
[+] [-] dlsspy|14 years ago|reply
grabs water bottle
[+] [-] burgerbrain|14 years ago|reply
(Odd how one ordering of the two words seems to imply to me a sort of reusable bottle made of heavy plastic or metal while the other ordering implies those cheap plastic bottles of water that often times cost as much as the reusable ones anyway).
[+] [-] vyrotek|14 years ago|reply
But, I don't think showing the cost of SMS is the right way to fix the market. Guess what, there are a lot of things in this world that you buy with ridiculous mark ups.
[+] [-] burgerbrain|14 years ago|reply
[+] [-] pistoriusp|14 years ago|reply
Most of the time when I get a SMS it's when someone is trying to sell me something I don't want.
[+] [-] billybob|14 years ago|reply