MARK-UP ON TEXT MESSAGES 4,900 PER CENT: EXPERT

The consumer mark-up on some text messages is an estimated 4,900 per cent, according to a leading Canadian computer scientist who testified before U.S. senators on Tuesday.


Srinivasan Keshav, Canada Research Chair in tetherless computing at the University of Waterloo, told lawmakers probing text messaging rates and the state of competition in the wireless telecommunications industry that the maximum cost of a single text message "very unlikely" exceeds 0.3 cents.


In Canada, the large cellphone companies charge pay-per-use texters 15 cents to send a text message and, beginning next month, Rogers will join Bell and Telus with an additional charge of 15 cents to receive a text message.


In the United States, carriers recently increased their per-message rate to 20 cents for those without a text plan.


"I'm not here to judge whether the market is competitive or fair, I'm just telling you this is the price and this is the cost. Let people who are experiencing these plans decide whether it's correct or not," Keshav said in an interview before testifying.


Keshav was invited to Washington by the chairman of the U.S. Senate subcommittee on anti-trust, competition policy and consumer rights to testify as an expert witness.


"If that's what the market will bear, I don't have a problem with that, from any philosophical perceptive. The issue is â€" are consumers aware that there is such a big gap? Maybe they are aware and they don't care."


During his testimony, Keshav also challenged a key talking point of the industry â€" that the rapid growth of text messaging is driving the need for these charges.


In Canada alone, the number of text messages rose from about 174.4 million in 2002 to about 20.8 billion last year. And in the first quarter of this year, Canadians sent nearly 7.8 billion messages, compared to 4.1 billion in the first quarter of 2008, according to the Canadian Wireless Telecommunications Industry.


Last year, 280 cell towers â€" out of the four million towers in the world â€" were needed to carry the estimated 3.5 trillion text messages sent worldwide, Keshav testified, so there is no "congestion cost" associated spectrum availability and the rapid growth in popularity of text messaging.


Without access to company records, Keshav, a specialist in how such mobile devices as cellphones communicate with centralized server clusters over wireless networks, first analyzed text plans currently offered in North America, assuming carriers are not losing money on their text-messaging service.


He then considered cellular technology to refine his estimates.


Text messaging, known as Short Message Service or SMS, travels two wireless and one wired path. He considered this cost, the cost of storing a text message if the recipient were unavailable, and the costs of updating the billing and location databases to come up with an estimated total cost 0.3 cents per message.


U.S. telecommunications executives, who testified alongside Keshav, dismissed his analysis.


Randal Milch, executive vice-president of Verizon Communications Inc., said the Canadian computer scientist failed to consider the long-term infrastructure investments and costs of spectrum to make it possible for billions of text messages and trillions of voice calls to be sent daily.


Calling Keshav's testimony "interesting but not relevant," Milch added, "I believe that the question of costs is not relevant to this," explaining "that is not how prices are set in an unregulated industry."


In Canada, a spokesperson for Telus reiterated that the "cost of spectrum has gone up dramatically" to fund growth in the system.


"Just looking back over the last year, the industry has invested $4.3 billion in wireless spectrum. You can't double your traffic volumes every year without significant investments in new technology and greater capacity," said Elizabeth Whiting, adding Telus capital expenditures for 2009 are expected to be about $2 billion.


"To fund these investments, we need to charge a nominal and fair price for services, including text messages, that are carried on our network," she said.


Julie Smithers, a spokesperson for Bell, said the company can't comment on the Keshav's study because it's not based on Bell's network.


"It seems to be based on other carriers' networks that employ different technology . . . Every carrier's network has its own technology and its own implementation, and as a result no two carriers are identical."


Smithers added Bell does not disclose its costs or profit margins. Costs are proprietary, added Rogers spokesperson Carly Suppa, pointing out "high value SMS pricing" starts at $5 per month.


Whiting said the price of sending a text message has increased only five cents, from 10 cents to 15 cents, since 2002, while the cost per minute of a cellphone call has dropped by more than 40 per cent.


Keshav estimated the storage cost is 0.00014 cents per text message, pointing out consumers can buy five terabytes of storage, which is enough to store 35.5 million text messages, for about $1,000. And if each of the 9.58 billion text messages sent per day last year were stored for one day, this would require roughly 1,343 terabytes costing around $1.34 million.


Database cost per text message is a "negligible" cost of 0.03 cents, he testified.


And since the text messaging load under "very conservative assumptions" does not exceed 0.06 per cent or six ten-thousandths of the capacity of a wired network link, he did not include this marginal cost in his calculation.


Wireless paths have significantly lower capacity, but voice is typically carried in cellular networks at a rate of 8,000 bits per second compared to a text message at a rate of 140 bytes or about 1,100 bits.


As a result, a voice channel can carry about seven text messages per second or 420 text messages per minutes at a cost of no more than 0.09 cents in the U.S. and about 0.10 cents in Canada, Keshav testified.