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The True Cost Of SMS Won't Matter Much As Mobile Devices Advance

from the it-will-work-itself-out dept

Last week, Slashdot linked to an entertaining analysis of the cost of SMS messages. Noting that many carriers are raising their SMS prices despite increasing demand for the service ? demand which should be spurring competition ? the author of the post figures out the number of bits in a text message and concludes that transmitting data by SMS is about 15 million times more expensive than doing so over a commodity internet connection.

But of course this isn’t really a fair comparison. A commodity internet connection doesn’t afford the ubiquity that a cellular network does. Comparing the data rate and price of voice traffic is probably more instructive (although the two types of messages are admittedly not transmitted in the same manner across the network). Taking AT&T’s overage charge of $0.45 cents/minute and 13kbps as a plausible bitrate for a GSM call, my calculator says that SMS data is a mere 316% more expensive than voice traffic.

That’s still not great, though. And there’s no question that SMS prices are going up even farther ? in the past year or so the Consumerist blog has been full of posts encouraging various carriers’ users to escape their contracts thanks to those contracts’ newly-increased SMS fees. It’s an unfortunate situation: very few consumers select a carrier on the basis of its SMS offerings, and few will leave their carrier over them, either, blunting the consumer response to price increases. Plus, as the technology has gained popularity the mobile operators have lost the need to encourage its adoption through cheap rates. It’s not very surprising to see them conclude that the most profitable price point for SMS is higher than the one they had been offering.

Fortunately for the rest of us, this state of affairs doesn’t seem likely to last much longer. Although there’s little reason to have faith in the mobile market’s ability to bend the carriers to consumers’ will, new technologies are going to inevitably dry up the SMS bonanza. We’re on the verge of the iPhone SDK’s release, and Google’s Android seems likely to find its way into many cheaper handsets. These and other technologies mean that the average customer will have access to bulk data services on their handset soon if they don’t already. And once bulk data can be consumed, so many options for short message communication become available that SMS’s specialized role will disappear almost immediately. Between web interfaces, widgets, IM clients and email apps, there are a vast number of ways to send short strings of text. Services like Twitter that offer a variety of input modalities will no doubt help to stitch together this looming surplus of communication options.

Given how few bits are required to transmit those messages (and the generic nature of those bits), there’ll be no way for the carriers to keep short message transmission as expensive as it currently is ? not without without pricing web browsing, email and other mobile data services into oblivion. I wouldn’t expect SMS to disappear, but it seems safe to assume it’ll start getting cheaper soon.

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Comments on “The True Cost Of SMS Won't Matter Much As Mobile Devices Advance”

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25 Comments
Paul (user link) says:

I was talking with my brother...

who worked for Verizon, And he said Verizon Wireless was supposedly trying to encourage people to use SMS because for Verizon themselves, it was cheaper than a voice call. I really don’t have factual evidence to back this up other than what my brother was telling me. I’m not sure if its true or not, but its interesting. Plus, I can see trying to push SMS as being beneficial because it starts to free up waves because there will be less calls. Just my opinion, I could be wrong.

Chronno S. Trigger says:

Re: I was talking with my brother...

I don’t know if Verizon is pushing it that way, but I can tell you that text is much easier on any network than voice.

Take a 3min voice conversation and record it at standard voice quality, 11kbps. Take that same conversation and type it out as a .txt file with all the little emoticons that would signify the emotions. Even if that .txt file is split up into the little bits that would happen in sms messaging, the text will still be smaller than the voice.

Now if Verizon would charge a reasonable amount to encourage people properly…

Dave (profile) says:

SMS prices to drop?

Cellular carriers have two responses to the market:
1. If a feature is unpopular, drop it.
2. If a feature is popular, squeeze your customers until they squeal.

Look at Verizon, the king of finding ways to prevent you from adding anything or doing anything with your phone for free. Want ring tones? Pay. Want to move pictures to your desktop or a friend’s phone? Pay. Watch video? Pay.

SMS? What do YOU think?

some other guy says:

“Taking AT&T’s overage charge of $0.45 cents/minute and 13kbps as a plausible bitrate for a GSM call, my calculator says that SMS data is a mere 316% more expensive than voice traffic.”

13kbps, 45 cents/minute, SMS = 1120 bits, 316% more expensive.

780,000 bits = 45 cents -> +316% = 187.2 cents
780,000 bits = 696 text messages

Conclusion: You pay around a quarter of a cent per text message.

Is this correct?

Richard says:

SMS will be around forever

It’s on every handset and network*! If you consider that HTML email never made it to every PC mail client, good luck twittring your mother or similar. The beauty of SMS is that every phone can receive or send it, regardless of how low tech it is. MMS was a dud, one of the reasons being you never knew if the receiver could even receive it.

* I say this as a GSM user (Aus / Europe) – unsure about US.

Ryan (profile) says:

i thought

I thought that the reason prices were high anyway is because the network can’t support it if everybody starts using it.

Similar to how I can never make a call around midnight on new years eve, or when 9/11 happened – too many people on the network at the same time.

SMS is used by a very small percentage of cell phone users (it’s still under 50% I believe)

If everybody texted at once, it would bog down the current networks.

comboman says:

Re: i thought

If everybody texted at once, it would bog down the current networks.

No, that’s the beauty of SMS. Unlike voice calls, SMS messages are simplex (data only going in one direction) and no one cares about a little extra latency in their SMS messages when the lines are overloaded. That’s why in an emergency (9/11, Katrina, etc), SMS messages still get through even when the voice lines are clogged.

Anonymous Coward says:

SMS is the most expensive way to transmit data. It costs over $1000 a megabyte. In fact, it costs less for the US Space agency, NASA to receive pictures from the Hubble Telescope!!

Most UK consumers think of text messaging as the cheapest and easiest way to communicate, with a typical cost for a standard 160 character text message of approximately 12p. When you break down that cost and relate it to the actual amount of data being sent, the true cost of texting is revealed. Every character you send in a text message equates to 1 byte of data. When translating this into a per Megabyte cost, it becomes clear just how expensive it is in the UK to send text messages, with consumers paying approximately £750 per MB*.

Comparatively, the US space agency, NASA pays approximately £61.50 per MB to receive data from the Hubble Space Telescope, a sophisticated 11-ton machine located 600km from Earth. This amount includes all personnel, operational, data transmission and data processing costs for the Hubble program and equates to UK mobile users paying 12.3 times more byte for byte than NASA pays to capture and process images of outer space.

http://www.unstrung.com/document.asp?doc_id=126905

Scott Easterday (user link) says:

Phone Companies Ripping Us Off

I understand SMS works on a different system, but they could change it into part of the data plan. I look at my data plan bill and I use about 150MB of data on my phone per month. They could easily switch text messaging to this data plan and promote that. Charging $.45 for a text is a crime. The phone companies are making bank on SMS because it is so popular. My sister racks up 2800 txts a month. I would change services based on Txting. I do it more than talk on the phone.

Derek Kerton (profile) says:

Not Going Away

Hate to disagree, Tom, but SMS won’t be going away anytime soon. Your thoughts that the price may have to drop may be more accurate. But one-off prices may not drop. It’s the bundles that will.

As people have pointed out:
1) SMS is ridiculously expensive. Duh. We’ve seen this point since the late 90s. It’s always fun to do a per MB calculation on SMS, but if this is the first time you’ve noticed that, then you are a little behind the curve.
2) Most people who actively use SMS don’t pay the 10 cents US it costs, or the 12p UK cost for a one-off. They buy bundles which provide a much better rate…that is still subject to the high cost/MB from point 1.

SMS, however, has the unique advantage of being able to access pretty much every cellphone out there. Nothing else compares, except voice. Furthermore, if you’re familiar with Metcalfe’s law, you’ll understand that the power of being able to access more people in a communication network is exponential.

Say, Twitter is wildly successful with Android, iPhone, Symbian, WM6, etc. Say it’s installed on 60% of phones. Will mobile Twitter displace SMS? Still no, because 60% offers about 36% of the value of SMS (using Metcalfe).

I am sad to say that I was one of the wireless execs in 1999 saying SMS was dead (it wasn’t even in North America yet, but was being used abroad) because WAP, Blackberry, wireless web, and other mobile apps would kill it. Oops. I’m not making that mistake again.

SpecialChild (profile) says:

Text bundles

I pay £26.30($51.87)/month for unlimited text messages and 500 min. (although last year it was £35($69) a month)

I don’t think this is too bad, as i would pay similar for line rental and calls for a landline. I don’t tend to ring people that much, so it works out fine.

Admittedly, PAYG and out of tariff texts cost a lot, but it just supports other features…i hope. You have to be lacking a few brain cells if your going to text a lot without a decent tariff…same with calls, braodband or anything.

silizard says:

obscene profit

With SMS messages, you get a few kilobits/$. Fast delivery is not an issue; even long delays are not a problem.

A typical voice plan has hundreds of minutes for a few dozen dollars. Time is critical to delivery; delays must be under tens of milliseconds. Cost is on the order of 10^8 bits/$.

Why does every bit of SMS text at a low level of service cost the same as over 10 kilobits of voice at much higher level of service? SMS is a huge rip-off.

Derek Kerton (profile) says:

That's How Things Are Priced

Comment #20 asked a good question, directly above. The OP is correct that the profits are “obscene”, but there is a reason why the price is what it is:

If they have any market control, companies will NOT price their products and services at the cost. There is no incentive to enter into business if cost-based pricing were universal.

Instead, companies try to price their products at levels that the demand in the market will support, with some attractive margin over the cost. I’m skipping over a lot of econ here, but basically, SMS pricing isn’t based at all on the cost, but is more related to the perceived value of the service. Is it worth ten cents to be able to communicate with any person you know with a cell phone, almost instantly, 160 characters, silently? The answer is clearly yes.

Imagine trying to sell a service like this in the 70s or 80s. The value of that communication service is so high, people would pay dollars per message. Imagine selling it to officers in WW2, what price would they have paid? The value of good communications is quite high, and for that reason SMS prices are also set high.

Now, in a market with perfect competition, the price would be driven down eventually to near marginal cost. But, mobile telecom is definitely NOT a market with perfect competition. Barriers to entry are huge. So the prices are not driven down, at least not quickly.

The recent story about the rise in price of an off-plan SMS message is nicely contrasted by all the comments here that argue that a bundle of SMS messages is actually dropping in price. This is what we economists call price discrimination. Essentially, the carriers are offering better prices to the customers that are willing to do 15 minutes of legwork and research and sign-on to a bundle of services. For those who don’t do the legwork, the price remains high and at the moment actually spiked up.

Derek Kerton (profile) says:

Globally Local

Rishi,

It’s different in many different markets. In the Philippines, we see the most interesting SMS market in the world. Over 40% of mobile carrier revenues in that country come from SMS. Yes, that’s 40% of TOTAL revenues that come from SMS use alone. That means that Philippine celcos actually have the highest portion of revenue coming from data services, and the lowest portion from voice of any carrier worldwide.

The reason for this is arguably that a relatively poor (by US standards) population eschews expensive landlines opting instead for only a mobile phone. Yet voice calling was expensive for the majority pre-pay customers, so they learned to SMS. Then they bought SMS pre-pay bundles, and that’s how the Pinol mobile market works today. Big bundles of cheap SMS, heavily used.

Poster #19 is obviously from the Philippines, since he is on Smart, a carrier there. He therefore has a wildly different viewpoint than Tom’s original suggestion that SMS is on the outs.

Industry Analyst says:

iPhone SDK will cause SMS to "disappear immediatel

I certainly have a quibble with this paragraph:

“We’re on the verge of the iPhone SDK’s release, and Google’s Android seems likely to find its way into many cheaper handsets. These and other technologies mean that the average customer will have access to bulk data services on their handset soon if they don’t already. And once bulk data can be consumed, so many options for short message communication become available that SMS’s specialized role will disappear almost immediately.”

I rarely dispute TechDirt’s analysis, but this is just absolutely flat wrong. The reason that SMS is so popular is that it works across carriers, across handsets, across technologies and across continents. It is absolutely the lingua franca of mobile communication if not all communication. To suggest that two handsets or two operating systems, by offering access to bulk data comm will cause SMS to disappear immediately is completely absurd.

How would that happen? IM access? VoIP? Email? They’ll face the same problems faced today with landline IM: incompatibility among several IM vendors. That’s a problem that has never been solved satisfactorily.

More to the point, many operators still do not have highly developed mobile data networks; they do, however, have SMS, which rides on the signaling system. They are also likely to have SMS-capable handsets.

You guys can do better than this.

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