Cellular Voice is now a Commodity

apple-watchAs has always happened with every major telco product, cellular voice has probably reached the point where we can consider it to be a commodity. In economic terms, a commodity is a basic good that is reasonably interchangeable with other goods or services.

A brief history of cellular voice is probably the best way to show how the product has changed over time. I remember when cellular voice was introduced. At first it was an extremely rare product and only rich people or those whose jobs demanded mobility at any cost had cellphones. The units were huge and heavy and mostly were used in cars. Users paid a steep price to gain mobility, which was the first value proposition of the cellphone.

Cellular voice became a mass market product when the size of the cellphones shrunk and the batteries got good enough that they could hold a charge for a reasonable amount of time. Various versions of flip phones became popular and millions were sold. These early cellphones had lots of innovations other than just being mobile. For instance, I remember seeing a coworker buy an early flip phone that had features that we now take for granted. The phone stored your whole rolodex of contacts. But even more impressively, the phone kept visual track of who had called you and when. And long distance largely disappeared when the cellphone companies started selling minute plans instead of long distance plans.

But then came smartphones and cellular voice started taking a back seat. Data became the rage but all of the market emphasis was on using your phone to surf the web and to take advantage of the burgeoning wireless data business. The telephone part of the product was still important, but this is about the time when we saw cellphone companies start to blend in the pricing of voice, text and data into one bundle. People became less willing to pay high prices for voice and texting, and so the price of those products was buried into the monthly rate.

Skip forward to today and it’s easy to see that voice has lost all cachet. I have a teenage daughter and using the voice capability of her phone is at the bottom of her list along with email. She much prefers to communicate with pictures, emojis, text messages and social media sites rather than actually talk to somebody on the phone. She’ll do it, but she clearly would rather communicate in some other way. In fact, she does the majority of her communications these days using an Apple smart watch, where she talks into the watch which then sends her message as text. She doesn’t even need a smartphone for most of her communications.

And the business world has also moved away from traditional voice. For instance, it’s routine for me to have conference calls using various web conference services that allow me to talk and listen through my computer.

One of the best indications that cellular voice is now a commodity is that there are now many willing to give away voice for free. Billionaire Mukesh Ambani in India is now giving away free voice to anyone buying a cellphone data plan. In this country there are a number of cellular providers allowing unlimited free calling using WiFi.

Cell phone companies are going to be offering voice as part of their products for a long time. But one has to wonder as we move to smartwatches, smart assistants like Amazon Alexa and a future of various wearables if we won’t soon stop using the word ‘phone’. My daughter’s smartphone is rarely used for the ‘phone’ features, and the time comes soon when she can ditch the phone completely I think she’ll gladly do so.

Sometimes the Numbers Tell the Story

Math_equation_dice_d6Statistics 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:

Text $1,000
Cellular Voice $1.00
Wireline Voice $0.1
Residential Internet $0.01
Backbone Internet $0.0001

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.