Senator Demands Explanation for Skyrocketing Text Message Rates

With the exception of unlimited plans, major wireless carriers have raised their prices for text messaging almost in tandem by more than 100 percent over the last three years, a fact that caught the attention of U.S. Senator Herb Kohl, D-Wis., chairman of the Senate Antitrust Subcommittee.

Kohl sent a letter to the chief executives of the four largest providers, Verizon Wireless, AT&T, Sprint and T-Mobile, requesting an explanation. It isn’t the official start of an antitrust investigation, but the senator’s wording suggests that he’s wondering whether a probe might be warranted.

Costs Don’t Justify Prices

“I am writing to express my concern regarding what appear to be sharply rising rates your companies have charged to wireless phone customers for text messaging,” he wrote, an increase that could be a “reflection of a decrease in competition, and an increase in market power, among your four companies.”

In 2005, text messages were commonly priced at 10 US cents per message, whether sent or received, Kohl pointed out. Last fall, Sprint raised its rate to 20 cents, and the other providers quickly followed suit — conduct that “is hardly consistent with the vigorous price competition we hope to see in a competitive marketplace,” Kohl wrote.

The cost of sending text messages does not justify the price points now in place, he continued. However, a change in the competitive landscape may have had a bearing, he allowed, noting the industry’s consolidation from six national providers to four in recent years.

“As Chairman of the Antitrust Subcommittee, I am concerned with whether this consolidation, and increased market power by the major carriers, has contributed to this doubling of text messaging rates over the last three years,” wrote Kohl.

By October 8, he wants the four wireless companies to provide the following:

• an explanation of the cost, technical, or any other factors that justify a 100 percent increase in the cost of text messaging from 2005 to 2008;
• data on the utilization of text messaging during that time period;
• a comparison of prices charged for text messaging compared to prices for other services from 2005 to the present — e.g., prices per minute for voice calling, prices for sending e-mails, and prices charged for data services such as Internet access over wireless devices; and
• an explanation of how a carrier’s text messaging pricing structure differs in any significant respect from that of its competitors, if it does.

Circumstantial Evidence

Based on the pricing data, one can see why Kohl is suspicious, said Keith Hylton, a law professor at Boston Unversity and author of the textbook, Antitrust Law: Economic Theory and Common Law.

“Four firms increasing their prices 100 percent at roughly the same time would raise suspicions among antitrust enforcers and potential litigants,” he told the E-Commerce Times. “To prove a violation of Section 1 of the Sherman Act, you have to prove conspiracy — but you can prove conspiracy with circumstantial evidence. Unusual coincidence, like all firms hiking prices at the same time, is considered a factor that would suggest that the firms are colluding.”

To fight such charges, the carriers will have to explain the timing and how it was that they independently reached the same price point, he continued. “The most important factor in inferring conspiracy is the existence of acts that appear to be inconsistent with individual self interest.”

Out of Whack

One argument that the carriers are unlikely to make is that the costs associated with text messaging have risen, thus prompting a price increase. “It costs very little for a text message to be sent,” explained Jim Keller, CEO of Context Technology Solutions.

Small packets of data between a cell phone and the control tower constantly transfer whether the phone is in use or not. Text messages are included with the control data, which means the associated infrastructure costs are negligible. Because text messages are very small, the data transfer fees are minimal, Keller said.

“The cost of text messaging for the carriers is very disproportionate to what they charge their customers,” he concluded.