It's good to be (one of several) kings

Yesterday I got a text message from AT&T today saying I'd just gone over $20 worth of text messages this month and that it would've been better for me to have paid $20 for one of their monthly text message subscriptions.

Most months, paying a la carte for text messages has worked out for me, but not this month. iMessages hasn't worked as often as it has in the past so some of my text messages to and from Apple iMessages users have ended up going the conventional route, and I was at Sundance where I received a ton of group texts from some Android users in my house.

Whenever I express my disgust at paying AT&T for text messages, people bring up the ridiculous mismatch between the cost of transmitting that infinitesimal volume of data over the telecom network and the actual cost they charge consumers. It's a mistake to think of text messages as goods that are priced on a cost-plus basis.

Telecom network operators invest a lot to build out their network. Once they have the infrastructure in place, and especially if they are part of an oligopoly, which many telecom operators were for quite some time, they can really charge whatever the market will bear for their goods. They're not looking to take the cost of a text message and mark it up by some percentage. They're looking to make as much as possible off of each of their subscribers across voice, data, text messages, and all the other services they offer.

Consumers routinely make the mistake of thinking the cost of their data, voice, and messaging plans are tied much more closely to the cost of delivering those services than they actually are. The pricing plans themselves contribute to that confusion because the more messages or data you want, the more you pay.

AT&T and Verizon no longer offer unlimited data plans anywhere in their cellular packages, and they'll blame people overloading their networks for doing so, but the truth is they are just pricing things to extract more revenue from their customer base.

This is the same economics mistake Brian Stelter of the NYTimes makes in his article Rising TV Fees Mean All Viewers Pay to Keep Sports Fans Happy. On the surface, it seems like he's right. Since ESPN is the most expensive channel for cable operators to carry (at last check when I was at Hulu, the SNL Kagan rate for ESPN was something like $5 per subscriber per month, by far the priciest of all cable channels), it seems like people who don't watch ESPN are paying to subsidize those of us who do watch ESPN.

However, almost everyone I know only watches a small fraction of the hundreds of channels they have to pay for in the cable bundles available to them. You could make arguments that ESPN viewers are subsidizing people who watch Lifetime and the History Channel.

Cable and satellite companies, like telecom network operators, have built out this expensive network infrastructure, and they are also fortunate to be part of a legal oligopoly. They work hand in hand with content owners to push the prices of your cable subscription up every month, and until now, the cord-cutting has been minimal. As your monthly cable package prices goes up, the cable/satellite guys make more money, and they hand more of it over to the content owners. Why wouldn't they both continue to squeeze more money from consumers as long as possible?

The same applies for your broadband internet access. The cost of your monthly internet access isn't based on the cost of delivering that bandwidth to you. The margins on broadband internet have been estimated to be upwards of 90% to 100%. Most of that infrastructure was paid off years ago from cable customers. Carrying internet data over the same cables and being able to charge for that service is just gravy. They can charge those extortionate rates because most consumers have very few broadband alternatives, if any, where they live.

Trying to lower the amount you pay for monthly text messaging, cellphone voice and data, cable/satellite subscription, and your internet broadband is almost impossible for consumers. If enough consumers started to cancel their text message plans because of iMessages or WhatsApp or something else, AT&T would just gouge us for revenue another way to make it up, maybe by raising the price of data or voice plans. 

The only reliable way to drive down price of these services is to offer real competition to these legal oligopolies. The FCC really failed U.S. consumers in allowing them to end up beholden to these communication oligopolies (enterprising reporters out there, this is a subject worth a long article). To build out the types of infrastructure to compete with these companies is priced beyond the hope of all but a handful of companies.

Disruption has not come as quickly as we all would love. We all thought we'd be watching content for much less on our Google or Apple TVs, or that we'd be making voice calls over some ubiquitous wi-fi network blanketing the country, and it would all cost much less than we'd paid for the equivalent services before.

Failure just forces disruptors to be more creative, though, and businesses with outrageous margins like these oligopolies have tend to fall prey to the barbarians at the gate in the totality of time. I've recently seen some companies starting to take new attack vectors on the incumbents, and I suspect the challengers will be more successful this time around. That's a subject for another day, another post.

UPDATE: Timely, but perhaps some proof that competition is the only way to get these oligopolists to lower their prices: a Time Warner broadband customer living near the Google Fiber installation in Kansas received an unsolicited speed bump and price drop.