Free Market Failure: Telcos Charge More For Sending A Text Next Door Than Cost Of Sending Data From Mars
The telco industry charges more, kilobyte by kilobyte, for sending a text message from your phone to next door than what it costs to send the same message from Mars to Earth. This is the apex in this series of the dysfunctional telecom market, giving a background to why the telecom industry wants control of the Internet so badly, and is using every conceivable resource to stall, prevent, and delay its resulting economic development.
For the third installment in this series, we focus on text messaging. FoI reader Chris Monteiro suggested that we should describe how it is more expensive to send SMS text messages from your phone, kilobyte by kilobyte, than it is to send the same data from Mars to Earth. That couldn’t possibly be right, we thought, but nobody seemed to have done the math before.
So let’s do the math.
The cost of the Mars Global Surveyor probe was roughly 200 million USD for the satellite and launch, plus 20 million per year. So, 400 million USD. It operated for nine years, transmitting at an assumed average of 42,667 bps. Assuming it transmitted 24/7, that comes down to 42,667 × 3,600 × 24 × 365 × 9 / 8 / 1,024 / 1,024 / 1,024 = 1,410 gigabytes of data at a cost of 400 million dollars, or roughly 284,000 US dollars per gigabyte. That number includes the cost of the actual Mars probe and its launch, as well as the cost of the NASA crew handling its journey to Mars for almost a year before it started transmitting.
The charge for sending an SMS text message next door is about 5 USD cents (let’s use the same currency for simpliticy’s sake). Each text message is 140 bytes. This means that there are 1,024 × 1,024 × 1,024 / 140 = 7.67 million text messages per gigabyte. Multiplying this number by 0.05 gives us that the traffic charge when sending an SMS text message next door is 383,000 US dollars per gigabyte.
(UPDATE: As pointed out in the comments, an SMS text message is 160 characters but 140 bytes, so the cost per gigabyte comes even higher – it was originally and erroneously stated as 336,000 USD per gigabyte based on a 160-byte count. Downstream numbers adjusted accordingly.)
So the situation really is as insane in terms of telco industry overcharging as was suggested: the telcos charge more, kilobyte by kilobyte, to send a text message next door, than it costs to send data from Mars – even when including the cost of the actual Mars probe, its launch, and NASA personnel for ten years!
This is an abysmal failure of free market forces to converge the end price with the cost of production. (To add insult to injury, the practical cost of production is zero in this case, as SMS text messages are sent on unused slots in the wireless control channel.) Just for the sake of argument, let’s calculate what an SMS text message should cost if priced at net connectivity traffic rates.
We observed yesterday that wireline traffic costs at most 0.25 cents per gigabyte to the end-user. Fitting 7.67 million text messages into a quarter of a cent comes down to a production cost of at most 33 nanocents per text message, compared to the five typical cents charged. (Over-the-air traffic costs slightly more, but again, this travels in the control channel.)
Concluding, how do these numbers translate into actual telco profit markup on text service, to evaluate market efficiency? We recall that the profit markup on data roaming is an unbelievable 1,400,000%, and that a healthy, functioning market can sustain profit markups of 5% to 10% in the face of active competition. Comparing 33 nanocents to 5 cents gives us a mind-boggling telco industry profit markup exceeding 15,000,000,000% – fifteen billion per cent – on sending text messages next door. When SMS text messages are sent next state, which are charged at about 50 cents, the profit markup exceeds one hundred billion per cent.
This is not just an abysmal market failure, it is more than that. It is a personal insult to us who have publicly defended the belief of the workings of a free market, this being incontrovertible hard data that the telco industry needs to be politically restrained with a complete absence of humor.
For there are already next-generation companies who will have the side effect of killing the entire telco industry by providing the same services free of charge. From the Estonian Skype (voice services), via the American Google Fiber (wireline net connectivity), to the Spanish Fon (wireless connectivity), these companies are proven sustainable and can provide the entire telco offering free of charge as a baseline service in a completely viable next-generation business model.
No wonder the telco industry is trying its damndest to prevent this generational shift from happening. It’s going to wipe them out. There’s no room for a billion-percent profit markup if your competitor provides a better service for free, and especially so if that competitor will enable a whole suite of new products, services, and jobs that go way beyond the thinking of your own industry.
So it is bad policymaking – no, terrible policymaking – to allow the incumbent telco industries to prevent this economic growth (and their own replacement) by giving them any kind of control of the Internet, like with the upcoming coup attempt at the ITU’s meeting in Dubai, or trusting them politically with Internet rollout.
(End note: With a free market, we are referring to a non-discriminatory market that is optimized for low barriers to entry, and where end prices converge towards cost because of functioning competition. We are not referring to an unregulated market where no rules are enforced by governments, for the simple reason that no such market exists on planet Earth. The comments derailed somewhat around this subject on the last article. As these articles cover important subjects for future policymaking, and they are read in Brussels, please stay on the topic of information policy.)
This article is also available in other languages: French.