Guess What Texting Costs Your Wireless Provider?

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When my teenage son ignores me while tapping away furiously on his cell phone, I have the consolation of knowing that he has joined the quickest-growing form of two-way communication in human history.

A decade ago, just about no one in the U.S. sent these messages, known as Short Message Service (SMS) texts. This year, we will zing out 1.2 trillion of them, predicts market-intelligence firm IDC.

That translates to a barrage of messages from each user, especially teens, who seem to be receiving new text messages — a.k.a. "blowing up" — more than they take new breaths. The average U.S. mobile teen now sends or receives an average of 2,899 text messages per month, according to Nielsen Mobile. "With teens, the act of picking up a phone and calling someone is dropping away," notes Christopher Collins, a senior analyst with Yankee Group.

What's most amazing about the texting craze is just how inexpensive it is for mobile carriers to provide this wildly popular service. SMS messages are not only extremely short (maxing out at 160 characters), but they also cleverly exploit today's digital phone networks, leveraging transmission channels between phone and cell tower that were originally designed to coordinate voice calls. "They cost the mobile carriers so little that you could argue that they're free," says Collins.

That situation set antitrust alarm bells ringing when AT&T, Sprint, T-Mobile and Verizon all raised their pay-per-use costs of sending a text message from 10 cents to 20 cents over the past three years. That prompted Senator Herbert Kohl, the Wisconsin Democrat who chairs the Senate Judiciary Committee's subcommittee on Antitrust, Competition Policy and Consumer Rights, to hold hearings on the matter in June.

At those hearings, Srinivasan Keshav, a professor at the University of Waterloo in Ontario and an expert on mobile computing, presented a detailed analysis of all the expenses that carriers incur in handling SMS messages. He showed that the wireless channels contribute about a tenth of a cent to a carrier's cost, that accounting charges might be twice that and that other costs basically round to zero because texting requires so little of a mobile network's infrastructure. Summing up, Keshav found that a text message doesn't cost providers more than 0.3 cent.

You don't have to be a Wall Street analyst to do the quick math: with a carrier cost of one-third of a penny, when a customer pays 15 cents to send a message, 98% of that 15 cents is pure profit. (Of course, you already knew that in your gut; that's why your stomach turns every time you examine your cell-phone bill.)

Carriers respond that pay-per-use covers only a tiny and dwindling percentage of use. "Generally, the structure of our pricing plans has moved away from paying 'by the drink' to buckets of messages at much lower prices," Randal Milch, executive vice president and general counsel at Verizon Communications, emphasized at the hearing. Verizon's average price is about a penny a message, he added.

That downward price trend worries vendors.

"Texting is a major contributor to the industry's profitability," says David Barden, a senior research analyst at Bank of America Merrill Lynch. Among the Big Four national players, texting brings in an average of $8 per month per customer in revenue, he estimates, and generates about 25% of raw operating profit (excluding equipment subsidies).

"But the carriers are very concerned that messaging isn't generating the revenue it has in the past," remarks IDC analyst Richard Murphy. "Consumers are becoming more savvy, buying just the buckets they need. Many are signing up for unlimited plans, which will only drive down revenues more."

Cost analyses will stay flexible because SMS isn't constrained by capacity, says Collins. He draws an analogy to amusement parks: "Once you build the park (or wireless network), the marginal cost of each customer (or text message) is minimal."

"Eventually, every service, whether it be voice or simple texting or the most robust Internet application, will just be data riding on top of a robust 4G network," Collins continues. "Focusing on the costs of individual components may be misleading."

In the meantime, carriers aim to encourage more of us in middle age to start tapping. Their best sweetener? Hybrid phones that don't carry a smartphone's hefty price tag but do offer nice little QWERTY keyboards.

Dad texting? lol