Statistics can sometimes tell a powerful story. I don’t know that I have ever seen a more striking set of statistics than the following, which compares the retail price of various telecom products when compared per megabit of bandwidth used:
The statistic comes from professor Andrew Odlyzko, a mathematics professor at the University of Minnesota, and I will cover more of his analysis in another blog. But what is striking about these simple statistics is how much we pay for various services compared to the bandwidth each uses
It’s always been well-known that text-messaging is almost all profit, but these statistics really make that obvious. Text messages use nearly no bandwidth and yet even today there are cell phone plans that charge $0.10 per text message when a user goes over their base allotment. There has never been a telcom product that is priced so amazingly higher than its cost (which is really tiny). It’s not a stretch to talk about text messaging plans having 99% profit margins.
But the chart also shows that cellular voice is priced about ten times higher, on a bandwidth basis, than landline voice. There is a really simple statistic that I have recently used when talking about how profitable cellphone plans are for the carriers. AT&T and Verizon together have roughly 70% of the cellphone market in the US, and each of them makes roughly $1 billion per month in profits from that business. With roughly 100 million total cellphone users now in the US that means that the average cellphone customer of these carriers is contributing roughly $27 in profits to one of them every month, or $325 per year.
The above table also tells the story well for about the profitability of Internet service. The last two numbers show that the cost of residential Internet, on a per megabit of usage is 100 times more expensive than the cost of the Internet backbone (or the price that carriers pay for the raw Internet usage). This is why Comcast and other large cable companies are not upset to be transitioning to becoming mostly ISPs, because residential data is where the profits are.
There is one simple reason that some of these products are so expensive and the profits are so out of line with costs – and that is the lack of competition that we have in the US market where the vast majority of telecom products are sold by oligopoly providers. That lack of competition let’s these companies keep the profits on test messaging, cellular phone service and residential Internet service much higher than is reasonable. It has been shown in the US that in those handful of places where there is competition that prices end up significantly lower.
I have been reading a lot lately about how the US has both the most expensive residential Internet and the lowest average data speeds of any of the western nations. This is due almost entirely to lack of competition. But interestingly there are countries like South Korea that have even less competition than here that still have much better Internet pricing because the government there understands that Internet is a driver of the overall economy. The other countries with lower cost Internet have policies in place that foster competition and that promote the construction of fiber networks. Here, we let all of this up to the very profitable oligopoly providers who constantly cry that they can’t afford to invest in broadband infrastructure.
If there is any one proof that there is an oligopoly in the country it’s the fact that Comcast and Verizon have a joint marketing agreement to sell each other’s products in their business offices. That fact alone ought to be enough evidence that Comcast should not be allowed to merge with Time Warner. The FCC doesn’t really need to be spending a ton of money to analyze the proposed merger and they could use this one fact to just say no to Comcast. The short and simple table above shows the effect of oligopoly competition in this country. Sometimes the numbers tell the story better than words.