How Wireless Service Providers Make Their Money

My com­par­i­son of AT&T’s post-paid ver­sus pre­paid call­ing plans gave me some insight into how wire­less ser­vice providers make their money. Based on this empir­i­cal evi­dence, the bot­tom line is that, just as peo­ple thought, we’re being overcharged.

Under uti­liza­tion. Depend­ing on the ser­vice plan you have, the adver­tised equiv­a­lent per-minute rate is some­where in the range of $0.10–$0.25 per minute. How­ever, in order to min­i­mize your rate, you have to use up to but not over your allot­ted min­utes. That’s the key. If you don’t use all your allot­ted min­utes, then your actual equiv­a­lent per-minute rate is higher. My old plan had 200 min­utes per month and I aver­aged around 160 min­utes. At the time I can­celed the ser­vice my monthly bill was $42. So I had an aver­age rate of $0.26 per minute. That doesn’t seem so bad until I real­ized on my low vol­ume months (< 100 min­utes of usage) I was pay­ing an equiv­a­lent rate of over $0.40 per minute. I didn’t have any rollover min­utes with my plan but even if I did, again the under uti­liza­tion applies. Just because you have unused min­utes doesn’t mean you will actu­ally put them to use if your aver­age usage doesn’t change. So it’s no great loss to the wire­less provider to offer rollover min­utes because most people’s call­ing habits will not change. Over­ages. Wire­less providers count on the fact that a) peo­ple don’t ini­tially know their usage habits and b) peo­ple are slow to change their plans if their usage changes. Because of a) con­sumers tend to under­es­ti­mate how many min­utes they need. As a result they’ll go over and often pay two to four times their adver­tised rate. This hap­pened to me once. I sim­ply adjusted my call­ing habits, and I haven’t had an over­age charge since. On the other hand most peo­ple don’t con­sider if their change in usage is a tem­po­rary or a more per­ma­nent change. Enter fact b). Peo­ple are reluc­tant to upgrade to the next tiered plan because psy­cho­log­i­cally it means a higher monthly bill. Add to the fact that it takes effort on their part to change the rate plan and before they know it, a monthly bill is two to three times greater than had they sim­ply changed the plan after the first month that they saw over­ages. You’re bet­ter off pay­ing for a plan with more min­utes than stick­ing with a plan with less min­utes and going over.

Text mes­sages. If you don’t pur­chase the unlim­ited text mes­sag­ing add-on pack­age, they get you com­ing and going depend­ing on your provider and ser­vice plan. It’s one of the rea­sons why I was reluc­tant to give up my old plan. I wasn’t charged for mes­sages I received, only for those that I sent. And the num­bers just don’t add up. To send 160 bytes of data, the length of a sin­gle text mes­sage, it costs $0.15 which is also what my cur­rent rate plan is for a sin­gle minute. One minute of voice con­tains 38,400 bytes of data assum­ing a 5 Kbps com­pres­sion rate. If you were to con­vert the text mes­sage rate to a per-minute rate it would be equiv­a­lent to 38400/160 * $0.15 = $36 per minute! And that’s just one way!! Talk about price goug­ing if you’re the con­sumer. But if you’re the wire­less car­rier, “Holy profit mar­gins, Bat­man!” It’s so easy to under­stand why wire­less ser­vice providers don’t want open appli­ca­tions on their net­works. It would be way too easy for some third party to under­cut this cash cow. I guess it’d be too much to ask for the US wire­less providers to adopt a model like Japan where unlim­ited SMS is an included plan fea­ture and not some premium-a-la-carte or add-on service.

Access fees. This is spe­cific to AT&T’s pre­paid Pay As You Go with free mobile-to-mobile calls. The adver­tised rate is only $0.10 per minute. Plus if you call any­one else who is an AT&T cus­tomer, you don’t get charged any air­time. Sounds great except for the fact you pay an access fee of $1.00. This fee is assessed once per day and only if you use a voice fea­ture on that day. I took my bills and cal­cu­lated the costs if I were on this plan. For one month, I would’ve paid $7.80 in air­time fees but $18.00 in access fees. For a dif­fer­ent month, the charges would’ve been $3.30 and $32.00, respec­tively, where the major­ity of my calls were to AT&T cus­tomers. (Note: That par­tic­u­lar bill cov­ered more than a full month of usage.) This was my biggest clue that wire­less providers over­charge their cus­tomers. Let’s say I only call one per­son who also hap­pens to be an AT&T cus­tomer. This means I would not be charged any air­time; only access fees would apply. Let’s say that I call this per­son once per day every month and each call lasts one minute. The bill would be $30 a month. Now let’s say that each call lasts a full 24 hours instead of one minute, or each day I make enough calls of vary­ing dura­tion that fill the full 24 hours. The bill would still be $30. So as a busi­ness you’d want to cover this worse case sce­nario and still be prof­itable. This would indi­cate to me that $30 is the min­i­mum a wire­less provider would need to take in per cus­tomer (assum­ing there are enough cus­tomers) to cover all the costs of main­tain­ing and grow­ing the busi­ness. The fact that the cheap­est plan be it pre­paid or post-paid is cur­rently $29.99 would be cir­cum­stan­tial evi­dence in sup­port of that con­clu­sion. Plus since no rea­son­able cus­tomer would ever use a phone 24/7, the rule of under uti­liza­tion applies and that as long as the phone isn’t under con­stant usage $30 per month will still pro­vide a decent profit mar­gin. Which means that all these add-on fea­tures are just pure profit. Some cir­cum­stan­tial evi­dence in sup­port of that is the fact that if you’re will­ing to tack on any add-on ser­vices, a sales per­son is more than will­ing to cut you a deal on hard­ware and acces­sories. They’ll make the money back in just a few months if that.

Roam­ing and long dis­tance rates used to be among this list but as most plans these days include nation­wide roam­ing and long dis­tance that’s no longer an issue, at least domes­ti­cally. Inter­na­tion­ally, it’s a dif­fer­ent story. At least now you can get your phone unlocked to allow using a local SIM card for the coun­try you’re vis­it­ing and/or you can pur­chase an inter­na­tional plan if you remem­ber to do so ahead of time.

I can only help but won­der if his­tory is just repeat­ing itself. The telecom­mu­ni­ca­tion indus­try is far from a monop­oly even with AT&T being the largest wire­less ser­vice provider, but it cer­tainly feels like a car­tel. Other than tech­nol­ogy, there’s very lit­tle dif­fer­en­ti­at­ing each of the incum­bent providers. One typ­i­cally goes with the provider who has the best cov­er­age (which can some­times means only one provider i.e., a geo­graphic monop­oly) and can sup­port the device(s) one wants to use. It’s just when I com­pare the US to Asia and Europe it makes me jeal­ous the bang for the buck and even the free­dom of choice peo­ple there get. I have noth­ing against busi­nesses mak­ing money, but I do have a prob­lem with col­lu­sion and writ­ing the rules in favor of the busi­ness player at the expense of the con­sumer through gov­ern­ment lob­by­ists. My sus­pi­cions of the wire­less industry’s anti-consumer prac­tices will be con­firmed when the phone unlock­ing exemp­tion to the DMCA will not be renewed. The only rea­son it passed the first time was the lob­by­ists didn’t sub­mit their objec­tions in time. It’s why I’m root­ing for Google to win the 700 MHz spec­trum auc­tion. We need more play­ers in this indus­try, and play­ers that don’t think in the same way as these for­mer Bells.