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David Pogue Goes Populist on the Cell Phone Industry

There was an interesting column Thursday (July 23, 2009) about aggravating cell phone company policies by technology writer David Pogue of the New York Times. He argued the pros and cons of exclusivity agreements on cell phone devices (such as the iPhone with AT&T) and whether Congress should intervene to eliminate. However, the main thrust of the article is that if the government were to intervene, there are other areas, that affect many more people, that should be looked at first. The full article can be found here; it may require a subscription, however. 

The remainder of the article is about other areas that Mr.Pogue thinks are possibly worthy of governmental inquiry. He takes a pretty populist view here, using the word "greedy" at least one time (and implying it in others), with many of the issues he raises. While we aren't here to defend the carriers, and have no doubt they are out to maximize the profits, we did want to highlight a few counter-arguments for the first three of his major points. 

The summary of each of Mr. Pogue's arguments is below; our thoughts follow.

Text message rates for all the carriers have doubled (to 20 cents per) in the last couple years. Even if the carriers aren't colluding, there is no cost justification for this increase.

MyRatePlan Analysis: Text messaging is by far the most popular activity people use their phone for, after talking. It has become even easier to text of late as a large percentage of new phones, from budget to high-end smartphones, have full QWERTY keyboards, either 'real' or touch screen versions (or both). We don't have U.S. data at hand, but strongly suspect that the 20 cents vs. 10 cents cost has had no effect on the increase in texting rates. The reason is that very few people pay the per-use rate for messaging; most are on a bundled plan offered by their carrier. (As an aside, if you are sending or receiving even one message a day and aren't on a bundle, you are probably overspending.) The effect of the increase in per-use rates was to push more people to bundles. This benefits both carriers (increasing the guaranteed revenue/user) and subscribers (adding cost certainty to texting). The cost-to-serve argument is irrelevant (perceived value should drive pricing, not cost +), but if anything the low network cost to deliver messages has allowed the carriers to make it much easier for users to message at reduced rates (with bundles).

Since mobile party pays in this country (vs. other countries or our landlines where calling party pays), the cell phone companies are ripping us off by charging both parties mobile-to-mobile calls.

MyRatePlan Analysis: There is some truth to this, although the impact for carriers is decreasing with larger minute allowances and benefits such as "Calling Circles" (e.g., MyFaves for T-Mobile) and unlimited mobile-to-mobile. However, we wanted to point out a historical reason that this is the case. When cellular came into being in the 1980s, it was extremely expensive, with bills averaging hundreds of dollars per month for those that had the service. Since the U.S. already had a well-established landline infrastructure based on calling party pays, and since a caller from a landline wouldn't know if they were calling one of these new cellular lines when they dialed, the decision was made at the outset to charge the mobile party to spare landline callers the expense.

Part of your monthly bill actually goes to reimburse the carrier for the discounted phone you received when you sign up. When you've 'repaid' the carrier, your bill should drop.

MyRatePlan Analysis: We'll save a discussion on the economics of the wireless industry for another day; and instead will just make three related points:

  • Many people think the phone should be separate from the carrier/plan (i.e., I should be able to buy the phone I want and take it to the carrier I want service from). The subsidy model, with all its flaws, has allowed the wireless market to grow much more quickly than it otherwise would have. If I was to be eliminated, the price of phones, particularly higher end ones, would likely increase, perhaps substantially.
  • The carriers' unwillingness (until recently) to offer discounted phones to those renewing their contracts led to a perverse market where new customers were treated better than existing ones, causing a high defection (churn) rate to other carriers. Given the high cost of acquiring a new customer, we always found this a bit self-defeating for the carriers.
  • Carriers are somewhat addressing the economic argument that Pogue makes, although from the back end, by reducing termination fees the closer one is to ending their contract. However, this also only happened with government prodding, so the larger point that Pogue is making - why is this an industry that seems to mostly move in response to regulatory as opposed to market forces - seems one well worth exploring.