Sunday, December 20, 2009

Getting the Message on Text Messaging Prices

Text messaging is a booming wireless service. As the Federal Communications Commission's (FCC) reported earlier this year, "[t]he monthly volume of text messaging traffic grew to 48.1 billion messages during December 2008, up from 18.7 billion messages during December 2006, 9.8 billion messages during December 2005 and 4.7 billion messages during December 2006." CTIA's semi-annual survey from earlier this year indicates that text messaging traffic surged 1,200% from 2005-2008, with an astonishing 1 trillion text messages sent and received just in 2008. But just as text messaging has increasingly gained the interest of consumers, it has increasingly gained the attention of public officials and others eager to intervene in marketplace. In the last year, marketplace interventionists have set their sights on resetting text messaging prices.

In Re Text Messaging Antitrust Litigation should serve as a wake-up call for the text messaging marketplace interventionists. Just this month a federal trial judge tossed out this class-action lawsuit concerning text messaging prices, thankfully averting what otherwise could have become a momentous feat of regulation by litigation. The nationwide class-action suit was brought in federal court in Illinois on behalf of all consumers who purchased text messaging services on a fee-per-message basis from all four major U.S. wireless companies from the beginning of 2005 to the present. Plaintiffs' lawyers alleged that Sprint-Nextel, AT&T, Verizon Wireless & T-Mobile conspired to raise and fix text messaging prices for consumers who purchased text messaging services on a per-message basis. (Recent Congressional hearings have addressed the same kinds of claims.) The primary factual allegation of non-competitive behavior is their allegation of parallel pricing" by tacit agreement whereby one carrier would raise per-message prices followed by the other carriers also raising their respective prices several months later. Plaintiffs' lawyers even included in their complaint U.S. Senate Antitrust Subcommittee Chairman Herb Kohl's letter to the carriers in September of last year inquiring into their price increases for per-message purchases. (Sen. Kohl has also sent letters to the FCC and Antitrust Division of the Department of Justice, urging investigation of text messaging pricing.)

The case was dismissed for the failure of plaintiffs' lawyers to allege facts sufficient to state a claim under Section 1 of the Sherman Antitrust Act. Horizontal price-fixing is per se illegal under antitrust law, but here the judge found nothing but empty labels that never rose to the level of plausibility. What's more, the judge's ruling contains some commonsense wisdom that our public officials should keep in mind when it comes to prices for text messaging.

As Judge Matthew F. Kennelly's ruling recognized, consumers may purchase text messaging services either on a per-message basis or through a bundled plain. Bundled plans can include either set allotments of text messages or unlimited amounts. Moreover, since 2005, wireless carriers' "prices for other wireless services, such as voice calling and data transmission, decreased." (The FCC report mentioned earlier states that wireless revenue per minute "declined by one cent from $0.07 in 2006 to $0.06 in 2007, continuing the price trend since 1994.") But the plaintiffs’ lawyers' claims were directed solely at per-message prices for text messaging, not at bundled plan prices or at any of the other available wireless services. The judge's concluding words nicely sum up the situation:

In the wireless communications industry, price competition is fierce for voice calling, data services, and bundled plans. Most consumers purchase test messaging services on a bundled or unlimited basis. [Wireless carriers] charge consumers steep penalties for early termination of service contracts. Given these factors, parallel pricing in this single, relatively narrow part of the field in which they compete does not support a reasonable inference of an agreement not to compete.

In rejecting the price fixing claims, the judge pointed to the more likely explanation of events:

[A]s text messaging became more popular, [wireless carriers] sought to encourage consumers to purchase text messaging services as part of a bundled plan. ... By increasing the per-message price for text messages and encouraging subscribers to increase their usage of text messages through initiatives like the development of CSCs, providers could create an incentive for subscribers to purchase bundled plans to avoid the wildly varied (and sometimes wildly expensive) bills that could result from per-message pricing.

Businesses, non-profit organizations and advertisers use Common Short Codes (CSCs) as a tool for information campaigns and to keep their constituencies and customers up to date on any variety of subjects. But the number of messages sent to and received by wireless subscribers to CSCs becomes financially unfeasible when subscribers partake of per-message pricing. Since wireless carriers generate ad revenue from CSCs, they have every incentive to encourage customers to enroll in bundled text messaging plans.

Unfortunately, some critics of text messaging prices seem to ignore the fact that text messaging operates through advanced wireless networks that are expensive to build, maintain, upgrade, and expand. CTIA’s semi-annual survey, for instances, asserts that wireless capital expenditures totaled $217 billion from 1998-2008. Carriers reported an average combined investment of $22.8 billion per year from 2001-2008 to upgrade their networks. Just because the marginal cost of transmitting a text message through a wireless carriers' network may be a miniscule fraction of a $0.20 cent per-message price doesn't mean the wireless carriers aren't in need of recovering the cost of these extraordinary capital expenditures. Answering these same kinds of short-sighted complaints about text messaging prices, the judge wrote:

Even if the Court assumes, as plaintiffs allege, that [wireless carriers'] pricing for individual text messages resulted in revenues that were "several thousand times what it actually costs" to transmit a text message… plaintiffs have "done nothing more than assert that profits were extraordinary... not… that they were beyond those afforded by a competitive market."… Where, as here, the fixed costs associated with an industry are high… self-interested producers might attempt to charge higher than marginal cost prices for their products in order to recover some of their fixed costs.

Skyrocketing volumes of text messaging traffic strongly suggests that the free marketplace is matching supply with demand. The 1 trillion text messages sent last year alone speak to the apparent success of wireless carriers finding price points that consumers find agreeable. Calls for investigations and regulations of text messaging prices are particularly shortsighted when text messaging is taken in isolation. Wireless voice and data services have decreased in recent years and there are benefits to bundled offerings of text messaging with other such services. Marketplace interventionists who dislike current text messaging prices and demand change have a heavy burden to explain why their conjectural price preferences are better than consumers' actual price preferences.