Sybase Blogs – William Dudley

Time Magazine recently published an article titled: Guess What Texting Costs Your Wireless Provider? The thesis of this article is that the cost of a text message to mobile operator is between 0.3 cent and 1 cent. While there are many calculations that were used to arrive at this figure, I think many times they are leaving out the cost of SMSC licenses, inter-carrier messaging fees, IP transport fees, costs of supporting CALEA and implementing anti-SPAM and filtering capabilities, the cost of customer support, and yes, the ability to recoup some margin from the ever-increasing usage of bundled messaging packages that have made texting so popular, today.

On June 16, 2009, the Senate Judiciary Committee held a hearing titled: “Cell Phone Text Messaging Rate Increases and State of Competition in the Wireless Market.” There was testimony from several points of view (the mobile operators: AT&T, Verizon, and Cricket, Consumer’s Union, and by Srinivasan Keshav, Professor and Canada Research Chair in Tetherless Computing from the University of Waterloo). I urge you, if you are interested in this subject, to review some of the testimony. In my reading of the testimony, the operators highlighted each of their contributions to the industry, along with evidence how PPU (Pay Per Use) is being rapidly displaced by bundled plans and how bundled plans are helping drive down the costs of individual texts to consumers on the bundled plans. The Consumer’s Union point of view, is that roughly 30% (I’m not sure I agree with that figure) of consumers are still PPU and they can’t afford bundled plans. Finally Dr. Keshav states that the actual cost per message is 0.3 cent to 1 cent, depending on how one calculates.

The problem is that there is so much more to providing text messaging services than the available control channel space. The United States now generates more text messages than any other country in the world. Consequently, one might argue that the cost to provide this service to the consumers is higher. At the end of Q1, 2009, the US generated over 330 billion text messages. That breaks down to around an average of 43,000 messages per second, successfully delivered, on average across the country. However, that’s only the average. At several times per day, that message delivery rate drops and rises — sometimes by 2 to 3 times. Consequently, the infrastructure (SMSCs, inter-carrier ecosystem, networks, etc), must be sized to support the peak rates as much as the overall average.

SMSCs are typically priced based on messages per second processed. I recall that when I was working for an SMSC manufacturer in the early part of this decade that SMSC prices were in the millions of dollars to support 1500-3000 messages per second. Of course, by today, these prices have dropped for 1500-3000 messages per second, but the infrastructure must now support 10, 20, 30 K or more messages per second. Many of the prices are based on transaction rates as well as subscriber usage and other factors. Each message must be logged and stored and should be able to be searched and retrieved for law enforcement purposes. Evidence of each message should be archived for reporting and billing. While yes, the cost of storage has dropped — the cost to maintain and process several billion messages per day in a database is still substantial.

Depending on the market and carrier, approximately 40% on average, of messages are destined for other networks — sometimes in other countries. There are several inter-carrier hubs operating in the United States and all have differing pricing schemes that incrementally add to the cost of a message. Furthermore, these costs are even higher if the message is destined to another country. Even if these were sent directly (without the use of a messaging hub), the carrier would potentially incur termination charges by the destination non-USA operator. These can run as high as 7 Euro cents in some cases!

So, back to the Time article, for a moment:

“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).

After all, the major operators are also public companies, governed by Board of Directors and answerable to shareholders. They are in business to make a profit. The Big-4 with hundreds of thousands of employees, along with many supporting industries contribute a significant amount to the US and global economies.

It is true that once 4th Generation networks are prevalent, that texting, as we know it today, will utilize only IP networks, but the true fact of the matter is, much of the supporting infrastructure will still be needed above and beyond the mere transport of messages between towers and devices. At that point, we can and should revisit the true cost of a message. But for now, I believe there is a great deal of misinformation floating around out there, as to the true cost and how it is calculated.