What's in a SMS message? The real cost & just how badly you're being ripped off
techvibes.com
techvibes.com
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 don't have a solution to propose, but this is my observation.
However, there is a difference between bulk, wholesale costs and individual retail costs, and prices. SMS is hardly the one and only example of high markup goods in history. Indeed, there are a plethora of entire industries in the same boat. Consider toys, many toys cost a few percent of their in-store retail prices, but again those costs are in bulk at wholesale. The same applies to batteries. And everyone knows about the huge markups in furniture and mattresses. The best advice is to find alternatives or shop around. If you just give in and accept the price that means you've declared you value the good you receive higher than the price you're paying for it (and in many cases SMS's are worth as much as people are paying).
SMS is popular because it is ubiquitous, the mobile phone networks have priced it at a point where the vast majority of users are happy to pay for it. There is no law against high profit margins, nor should there be in my opinion. You could argue there is a competition/monopoly/cartel issue here, but that wasn't too apparent in the article.
And as others have said SMS will eventually go away due to the availability of data plans. I wish all my friends had data plans and were on twitter, I would never need to send an SMS again, until then I can afford it, especially since I don't send very many.
A fourth operator is in process of entering the market, but it has had a lot of difficulties already. The 3 main actors really did all they could to slow the process down and even try to have the government refuse the license to the new one.
Their main reason? The new "challenger" is Free.fr. These are the same ones who pulled the internet market in France. The ones who came and proposed a free dialup access (minus communication costs), when all other actors were still on "3 hours + comm costs" kind of deals. The ones who pushed the ADSL market to lower prices for more service, and introduced the concept of "triple play" (you get a special router from the ISP, and you get free TV and phone calls added to the regular internet) ( http://fr.wikipedia.org/wiki/Freebox , the English page is lacking, though ). They forced the other actors (roughly the same ones as the mobile telecom) to come up with the same offers for about the same prices.
So that's why they did everything they could to prevent Free from entering the mobile market. By fear of the same kind of thing happening.
Free.fr managed to get their license though, and are in the process of establishing their antenna network. So we will see what will be, when they will really start, and announce their mobile deals.
Phone operators are NOT a free market. In every country, operators are heavily regulated and only three or four operators form a majority.
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.
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".
Anecdotally, this kind of what-it-costs consideration certainly influences my behaviour.
For instance, Easyjet doesn't pre-allocate seats on its planes, and offers 'speedy boarding' for something like £15 ($25). This means you get to board before those who didn't buy it (and, incidentally, sets up a game theoretic-type problem, in that it's only worth buying if enough others don't buy).
Irrespective of the value of this to me, I on principle never buy it. In fact, the very fact that they offer to take £15 off my hands for something that's transparently and utterly free to them lowers my opinion of them as a company.
(Note: obviously the price is set to engineer scarcity -- it wouldn't work if they charged £1 -- and from a rational/economic perspective it's a brilliant little wheeze).
Whenever I switch plans, I demand free, unlimited SMS (local and international), and it doesn't take much bargaining to get it. This friend of mine from another country had to pay to receive text messages from anyone (myself included at a premium, for texting him from abroad), which I consider downright apalling.
I told him to negotiate a better deal or to switch providers because he was being blatantly ripped off, and no: he argued quite religiously that doing so would be promoting low standards, and that commodizing his phone service was the last thing he could ever possibly want (no further reason given).
When I argued that I was just trying to be helpful, he accused me of being a nonconformist (as if the expression is inherently derrogatory) and started ranting about how little grasp of economics I have. (At which point I lost my temper to because, as XKCD quite nicely has it [1], someone was wrong on the internet.)
On their front, they need to generate demand for their service. If by offering me for free something which has zero marginal cost to them they can achieve so, then of course they'll do that.
I was very explicit about that: I didn't want a new carrier, I wanted a carrier which offered me free SMS. If they didn't have that, I bid them a good day.
It was no use trying to buy that plan at the store, and it did take me a couple calls to the same carrier to get everything as I wanted.
There were a couple other perks I wanted, but those were negotiated into a non-refundable monthly floor payment + additional charges if I exceeded my quotas.
The plan (serving two people) had: 1 GB 3G internet access, 500 minutes/month of calls shared between me and my s/o, plus another 500 minutes/month for calls from one of us to the other. National long distance calls charged local call prices. Any excess in minutes or GB is charged additionally.
This makes for R$ 140/month (R$ 70 each). With wi-fi becoming increasingly fast and hotspots increasingly common, this was probably a bad deal on the long term. I guess you should never bet against people who know their trade. :-)
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.
In reality, an MMS is about one million times more data than a text message.
Now, if an MMS had about a million times more data than a text message, that would make each message about 140 megabytes.
This is true right up until you present a req for more disk drives for one's network attached storage.
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?
American cell-phone plans generally give you a fixed number of calling minutes (plus various other bonuses, such as free calling on nights and weekends), and once you go over the quota, you pay for receiving calls. I just checked out the cheapest individual plan for Verizon in my area, and they charge 45¢ per minute after your allowance is up.
I assume they set things up this way because cellphone numbers share the same number space in North America as landline numbers, so if it costs more to maintain a cellphone network, the operator cannot recover those extra costs entirely from people calling into it.
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.
People were buying cars before Ford, but more people bought them when they got cheaper.
G+ could be created by anybody who had the dollars to buy enough servers (and the engineering capability to build it), it did not require a government license.
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.
SMS is sent during idle spots in that channel, but it is a very limited channel and you couldn't run large amounts of data through it, there just isn't enough idle time.
Scarce idle time sounds oxymoronic, but it is only idle in the sense that it isn't connecting and disconnecting phone calls.
The cost of programmers to create the product, the cost of servers, system admins, etc. Those aren't small costs.
No, but they are largely fixed costs, not marginal ones. http://en.wikipedia.org/wiki/Marginal_cost
I wonder how much really cost internet data traffic however.
It would be nice if they at least only charged different accounts. Texting anyone on my family plan means I pay for both sides.
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 mean of the user experience, not of the very different backend networks in place.
Looks like that's no longer an option.
Anyone with the $5 plan actually has free access to any data connection; T-Mobile doesn't even try to separate it from the other data plans. The only problem is they don't officially offer it anymore.
I've heard some people have managed to convince customer service reps to turn it on from scratch by calling with their SIM in a feature phone and saying they want an old cheap data plan that would support their old cheap phone for doing simple online tasks.
the cost of SMS is determined by how much consumers can be persuaded to pay
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.
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).
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.
Mobile carriers put enormous amounts of money into their infrastructure. Billions and billions, on top of the tens of billions they paid for spectrum. And they're not charities, so one way or another all that's going to get billed to customers, whether it's voice minutes, SMS, data, or plans with bulk minutes/messages/MB.
> Well, the money has to come from somewhere. You say SMS
> uses infrastructure that was set up for the voice
> network. But you could just as easily have said voice
> uses infrastructure that was set up for the SMS
> network, which would make SMS a bargain and voice
> overpriced.
This is hardly a "you say tom-ay-to; I say tom-ah-to" sort of situation. Using your logic we can attribute the roll out of phone lines as a 'fixed cost' of dial-up networking, but I doubt you'll find many supporters in the idea that all those lines were laid for the expressed purpose of dial-up and that analog voice calls are just 'piggy-backing' on the dial-up lines.
> And they're not charities
Before there was voice, there was paging. I'm not super familiar with GSM, but I know for CDMA the reason SMS messages have a small fixed size is they used to go out over the paging channel. I don't think that's the case any more for CDMA. I'm kind of surprised it is for GSM.
In any case, the point is there's no objective way to untangle costs in an item that has a large implementation cost but provides more than one service.
grabs water bottle
(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).
My sigg has been beaten near death. Horribly dented, etc... I'll keep using it as long as it keeps holding water. Then I'll get a new one and take it snowboarding for a while.
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.
Most of the time when I get a SMS it's when someone is trying to sell me something I don't want.
Actually, I agree SMS is a ripoff, but the marginal cost isn't why. It's a ripoff because it's something people want and there is no other way for them to get it, which is an effective monopoly. With Google Voice and other competitors gaining adoption on smarter phones, I expect this to change.
The monopoly argument does resonate, however, and I agree that introducing competition is a great advance.
Do people feel that self-sustaining websites are a ripoff because the creators no longer have to put in any time or effort to earn revenue?
SMS is "expensive" anywhere in the world when counting $s/byte, it's not just the US. The reason is that you cannot simply do price comparison based on data-rates: it's a flawed top-level down approach ignoring very real concerns and constraints.
The reason for SMS being relatively expensive per byte is that it's actually a hack which allows us to send data over the global GSM control channel, not a regular phone-allocated voice/data-channel. This makes it's main carrier a very bandwidth constrained channel and SMS is second class traffic sent on a as-available basis, but with queued on demand push-reception for the recipient.
Your data-traffic however has a dedicated channel, realtime priority, and realtime constraints, and it would need to go trough a intermediate service which can queue it if the receiver is not there. And the recipient would have to have an always on data-connection polling for incoming messages, draining your battery, much like Email push-notification does on modern smartphones.
In other words: Data and SMS are fundamentally different services, operating with fundamentally different channels and technologies. Your OSI-minded application-level analysis is incomplete.
True, this might not make much difference to the end-user of the service provided, but there are technical reasons for why SMS and data is treated and priced differently.
As long as SMS is a defined standard as it is now, and that standard involves piping shit trough the GSM control channel and not using data (something you don't want when roaming abroad), the fact that they are priced differently is perfectly reasonable. If the price-difference itself is reasonable is another debate all together.
Once you go down the path of using one of these other services, there's a standarization problem. I'd go nuts after a while if I had to juggle Google Talk, MSN, Huddles, or even fiddle with setup to make the multi protocol messaging applications play nice.
SMS is ubiquitous, and just works.
'Greatest ongoing con job'? Really? When the US housing con job was exposed, the world economy tumbled. SMS con job exposed... people shrug and go on.
I find it somewhat ironic that on a site dedicated to "find a niche and exploit it", there comes this article screaming 'bloody murder!' about business providing a service for a price above the bare bones wholesale cost.