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What's Wrong with Text Messaging?

This morning, the antitrust subcommittee of the Senate Judiciary Committee held a hearing on text messaging prices. Why? Because last fall Sen. Herb Kohl, chair of the subcommittee, began an inquiry into the curious tendency of the four major U.S. wireless carriers to raise per-message prices, more or less in tandem, when you would think that economies of scale and technological improvements would be driving prices down.

Here's the evidence, courtesy of Engadget Mobile: Sprint raised rates from 10 cents to 15 cents per message in October 2006, followed by AT&T in December, Verizon in January 2007, and T-Mobile in March. The same story repeated itself in late 2007 and early 2008 when prices went up to 20 cents.

There are two main defenses for the wireless carriers. First, this doesn't prove collusion; as the airlines have shown, it's possible for multiple players to change prices together (in the airline industry, it happens in a matter of a few days) without actually conspiring to do so. (I guess it's possible that there is collusion, but most industry analysts accept that you could get the same results without collusion.) Second, they say that average per-message prices are falling, because customers are switching to unlimited messaging plans, and the increase in total messages has outstripped the increase in text messaging revenue.

This issue really hinges on what antitrust law really is for; under prevailing interpretations of the antitrust statutes, the carriers are probably right and Senator Kohl is tilting at windmills. There are two possible froms of an antitrust argument: either you need to show illegal anticompetitive behavior, such as price-fixing, or you have to show market conduct that harms consumers.

On its face, lower average per-message pricing seems good for consumers. But when you look at the actual technology involved, the issue becomes less clear. As Randall Stross wrote last December, the marginal cost of text messages is not just small - it is effectively nil. In particular, in communications between the handset and cell tower - the place where bandwidth constraints might exist, at least for voice communications - text messages are tucked into the control channel that is used for internal communication between handset and tower. (That's why they are limited to 160 characters.) Once the text message is on the wired network, it is vanishingly small; a single photo you email to a friend could be replaced by 10,000 text messages. And since the carriers' capacity needs are being driven by real data (email, web browsing, video, etc.), they are getting text messaging capacity for free.

So in effect, the wireless carriers are bringing in more and more revenue for a service that costs them zero to provide. Looked at that way, it doesn't look so good for the consumer.

Will the Justice Department do anything? I doubt it. The belief that government should stay out of the marketplace is too deeply ingrained in a generation of lawyers and judges for de facto price fixing to provoke much controversy. But perhaps the recent financial crisis, and the skepticism it should create regarding unregulated markets, will help push the legal establishment back toward a more critical view of corporate power.

By James Kwak  |  June 17, 2009; 7:30 AM ET
 
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Comments

JK: "...or you have to show market conduct that harms consumers."

I'm guessing that Kwak hasn't taken antitrust class yet, because the statement above is simply wrong. State consumer-protection laws may restrain conduct that harms consumers, but federal antitrust law is aimed at protecting competition in the market.

One has to show that firms are colluding to restrain trade improperly. There's no evidence here that the carriers are acting in concert.

Posted by: tomtildrum | June 17, 2009 9:25 AM | Report abuse

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