Thursday, July 21, 2011
Wireless Cost Per Minute and Consumer Behavior
It has become a largely unquestioned “fact” that U.S. wireless consumers enjoy remarkably low per minute costs rivaling what the poor in Africa and Southeast Asia pay. Sponsored researchers recently chided the FCC for failing to state unequivocally how effectively competitive the U.S. wireless market is, largely by reciting the low cost mantra, counting carriers and heralding evidence of market entry. See, e.g., Gerald R. Faulhaber, Robert W. Hahn and Hal J. Singer, Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports (July 2011); available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1880964.
The low cost claim can be validated by certain assumptions, most notably that subscribers consume all or nearly all available minutes of use per month. So one way to goose the cost statistics would be simply to take the maximum available minutes of use, e.g., 450, 700 or 1200—remarkably identical for the Big Four national carriers—and divide it by the monthly subscription rate, conveniently forgetting to add the extra 20-30% in fees, taxes, surcharges and pass throughs. A slightly more valid analysis would use some national consumption average rather than the maximum allotment.
So if you come close to the allocated maximum minutes of use, or if you take the carriers at their word and robustly consume on an all you can talk, text or surf basis, you certainly have low per unit costs. It makes absolute financial sense to get on a texting rate plan at $10 a month—no make that $20 a month, raised in lock step by the Big Four—if you have nimble thumbs and one or more teens in your household. U.S. carriers don’t need sponsored researchers to tout lowest global texting rates when the average teen makes over 3300 a month.
Rather than prove the U.S. wireless marketplace is robustly or even effectively competitive, such uncalibrated calculations of cost do nothing more than confirm certain rather obvious facts about consumer behavior. When presented with a large basket of minutes, or better yet a buffet-style, unmetered service, many consumers push their consumption to maximize the perceived value. When I consume a buffet meal—especially those grand affairs at hotels—I consume well past a normal level of satiety. Call it wasteful, unhealthy and an encouragement of “overconsumption.” Call it unfair, particularly to people with small appetites who must subsidize their gluttonous, big appetite counterparts. But recognize that the low per minute rate results less from competition and more from a pricing strategy shared by all carriers offering post-paid plans.
Becuase the majority of U.S. wireless subscribers have post-paid plans with unlimited or large baskets of minutes, researchers can tout low per unit costs only if monthly consumption is high. Users of metered service are far more attentive to their usage and their cost per minute cannot drop simply by talking and texting more.
The availability of low cost per minute wireless rates in the U.S. for subscribers with large baskets of minutes or unlimited use says little about whether competitive necessity forces low rates. Nor does it “prove” a market driven need to price rates low.