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Against Monopoly

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Monopoly corrupts. Absolute monopoly corrupts absolutely.





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Why is international data roaming so expensive?

Why are international data roaming rates so high? There does not seem to be a lot of careful analysis. I have found one EU study - in which I have been unable to find one interesting or relevant fact or analysis. So here are my own back of the envelope calculations.

How high are international data roaming rates? I have direct evidence from two providers: an Italian provider TIM charges about $10 per megabyte; a U.S. provider T-mobile charges $15 per megabyte. The typical business user uses receives about 15 megabytes per day of email. My smartphone uses about four times this. By way of contrast, you can buy a SIM from Vodafone UK with 30 megabytes of data for about $30. Wifi at the airport or a hotel runs about $10-$60 per day. Over-the-air prices charged to local customers is much lower: TIM charges $25 per month for 5 gigabytes of data, of which probably about 2 gigs is actually used, so the effective rate is about $0.0125 per megabyte. T-mobile in the US charges a similar amount for similar service.,

We can summarize the data this way: for a five day trip the typical smartphone user will pay about $1000 for international roaming or about $100 for wifi. The local user pays about $4 for the same service. In other words, the markup over the competitive cost is about 250, and the markup over close substitutes is about 10.

No doubt some small number of customers are very wealthy and happy to pay several hundred dollars a day for the convenience of keeping the same phone number, not buying a new SIM, not having to locate wifi and so forth - despite the tenfold cost reduction by doing so. Surprisingly only 40% of international roamers turn off their data roaming. In the end it seems reasonable to conclude most people use data roaming not on purpose, but by mistake. Notice that TIM advertises their price as 0.8 cents per kilobyte - which doesn't sound like much, and has meaning only if you have some idea how much data you use. When I was lost in Paris, knowing the high cost of roaming, I turned on the data service to locate myself on the map. I expected it would be expensive. What I did not expect is that a single viewing of the map would cost 100 euros - cleaning out my account and making my phone unusable in the process.

No doubt telephone companies are good at setting prices to maximize their profits. Apparently such a large number of people accidentally turn on their data services that it is profitable to charge them 250 times marginal cost rather than charge a much lower fee to the much larger group of people who would be willing to pay for the service. Such a business strategy is possible only with substantial monopoly power and illustrates well of the problem of monopoly. Each international roamer pays a thousand dollars once for which they receive practically no value. After that they know to keep the data service turned off.

How can such a business strategy be profitable? The answer lies in the phenomenal growth rate of smart phones. Smart phone sales are growing at about 50% per year. If the stock is growing at a constant rate, it must also be growing at 50% per year. Suppose the typical international roamer spends one month per year roaming, and pays $1000 for one week before shutting off the service forever. If they were willing to pay $50 per week, then charging that would bring in $200 for each member of the entire stock of roamers. Since the stock of roamers is two and a half times the number of new roamers charging $50 per week would bring in $500 rather than $1000.

The international roaming market, lacking competition, is dysfunctional: rather than providing a useful service it taxes consumers one-time lack of awareness of prices. Eventually this will sort itself out: the market for smartphones is not likely to grow at 50% a year forever. Once smartphones start to satiate the market and growth drops to more modest levels - by the calculation above, about 25% per year - it will be profitable to start charging for services received rather than for consumer errors. A similar transition took place in the within U.S. market for voice roaming years ago; originally roaming outside the local area code was extremely expensive; now all providers offer national coverage.

There is an irony in all this. The market for selling smartphones is relatively competitive, and likely the international roaming "profit" is largely given back to consumers in the form of lower prices for contract smart-phones. Relatively rich international roamers subsidize smartphones for their less wealthy and well-travelled brethren.

There is a case for government price regulation here. Of course as smartphone sales diminish, government price regulation will enhance rather than reduce collusion. Ironically the lack of competition in the mobile phone market is largely due to government policy. Governments - wishing to control the flow of information - tightly control bandwidth. Some of this is done through monopolies given or sold to television stations, usually with a quid pro quo in the form of free or subsidized political advertising as well as restrictions on content.  As another example, free wifi is not an option in Germany as the government insists on knowing exactly who is logged on to the internet. Copyright law also plays a role here, as the copyright oligarchs are eager also that nobody access the internet anonymously.

A sharper analysis should probe the source of the monopoly power in roaming. Why cannot different mobile providers in the country you are visiting compete to offer you lower data rates? Unregulated countries like Panama greet visitors with giant signs promising lower long-distant rates if you roam with them. The reason this kind of competition is not more broadly possible is because SIM cards are tied to your home provider. Other mobile providers can bill you only through that same home provider. In other words: what your home provider has is a monopoly over your good credit record and means of payment. On the face of it this sounds absurd, and it is a wonderful illustration of the fact that not all property rights are created equal. Some property rights (copyright anyone?) serve to foster monopoly, while other property rights foster competition. This has been recognized in most countries to a limited extent: you now own the property rights in your phone number. But your phone company still owns the rights to your reputation.

There many organizations who compete for the rights to your reputation: Amazon, Google Checkout, PayPal, credit card companies, mobile phone companies, and banks all compete to provide you with direct online payment. The problem is that the SIM card technology prevents mobile providers from billing any organization other than your phone company. Here is a modest proposal. The SIM card standard was imposed (as part of the GSM standard) by European governments. So let them modify the standard to require that the user be allowed to provide alternative means of billing to over-the-air telecommunications providers: the small eagerly wishing to sell providers should be able to recognize my Google Checkout to bill me for cheap data service while I keep my usual phone number. The problem of roaming costs should quickly vanish in the dust of competition.

[I am grateful to a conversation with Philippe Jehiel of the UCL although he is in no way responsible for this. After going through numerous alternatives, we agreed that the most likely explanation for high data roaming rates is exploitation of consumer error in the face of a rapid influx of new consumers. The data on growth in the smartphone market seems to bear this out.]


Comments

Thanks for this David,

This has driven me nuts for a long time. The odd thing is the uniformity of the rip-offs. Such a pity no-one seems to buck the system.

Your post reminded me of two irritants purposely inflicted on us. 1. Why do hotels/motels still charge to make a call plus an additional charge should the call be long distance? The concept of long distance has pretty much died.

2. We received a ridiculous moronic offer from Verizon offering their help in controlling overage charges by enrolling in a "new" presumably more expensive plan. The solution is simple, Verizon could simply stop charging! Funny, how a company that can make and change the "terms of service" whenever they feel like makes a blatantly obvious disingenuous offer of "assistance".

Steve: do you have a link to the Verizon "offer"? For the hotels, I think the suffer a reputational problem. Nobody in their right mind would use a hotel phone to make a phone call knowing that they will be charged a ridiculous amount. Given that only people in their wrong mind will make calls, it pays to charge them a ridiculous amount. It is hard for a single hotel to overcome this "all hotels are bad" reputation. With wifi, they seem to be gradually overcoming it by making it free. The only two options seem to be "free" or "way too much."
Though, oddly, the cheap, sleazy motels often offer free phone calls, while the fancy prestigious ones charge through the nose for them.
Dan: Also, cheap hotels often have free WiFi, but expensive ones charge through the nose, perhaps because they know businesses are paying for it.
Below is the link to my Verizon blog post, which has an image of Verizon's "offer".

Corporate Condescension

Hotels are missing out on a trick: Provide two Wifi services: a) Pay through the nose for high bandwidth, low latency 'business/porn' service. b) Free low bandwidth, high latency 'tourist' service.

They can even use the stupid 'unsecured' FUD for the free connection. "Oh my god, my connection to the Internet is unsecured! Shock horror".

Considering that it is trivial nowadays for a relatively unskilled mischievous person to sniff passwords and session cookies out of the air, it's actually quite important to maintain secure connections. "Stupid 'unsecured' FUD" gives the wrong impression here.

(Yes, if you know how, you don't need the hotel to secure your connection, you can do it yourself. Fun fact: for paid wifi hotspots that put up a web page explaining how to get access / asking for a login, dns queries to the internet are practically never blocked. This allows you up to 1mbit/s of bandwidth routing all your traffic over DNS queries. High latency, and yes theft, but works perfectly for most purposes.)

Althouigh I don't want to make a commercial promotion here, Droam is busily chipping away at the data roaming monopoly by supplying you with a rental mifi with a localised sim. This gives you, at the least, 50mb per day of 3G data for US$ 5,- per day or even unlimited for US$ 90,- per week. Of course we sell a similiar service to Europeans going to the America's. Mifi supports 5 devices, incl. of course laptops and ipads. Anyway, check out www.droam.nl; we just put up an english site today.
Many do provide two wifi services at different prices...
It is an interesting analysis. However you should take into account the type of smartphone used while roaming. It can have a huge impact on the user's bill. As a proof you should read one of the latest Rysavy's report: http://www.rysavy.com/Articles/2010_12_Smartphone_Efficiency.pdf "Report on a study that compares the efficiency in bytes communicated using different smartphone platforms, examining applications such as e-mail, Web browsing, instant messaging and social networking. 2010"

A BlackBerry uses 4 to 8 times less bandwidth than an iPhone. And an iPhone uses a little bit less than an Androïd based device. As you demonstrated the bandwidth consumption has a direct impact on the user's bill.

The post is thought provoking, but I would expect a customer to change supplier after paying a 1,000 dollar bill, or to negotiate a reduction in the bill. I don't think the operator's strategy is to have a dissatisfied customer who never again uses the service. Probably some customers are actually using the service at those prices, and we will see price reductions as the smartphone customer base becomes more price sensitive.

Regarding Regulation, the EU has actually mandated a cap of 50€ per month by default for all users, which is in force since last summer. That in itself should be enough to avoid the 1,000 dollar bills, and is less intrusive than forcing a change in the GSM standard.

The post is thought provoking, but I would expect a customer to change supplier after paying a 1,000 dollar bill, or to negotiate a reduction in the bill.

(Emphasis mine.)

If the phone company can negotiate much lower bills in these cases, and still remain solvent, then these bills must be far out of proportion to their costs incurred on behalf of that customer -- prima facie evidence of colossal market failure.

Obviously we need more competition in the wireless space, and less regulation -- where's that fucking white space spectrum we've been promised for years?

Nova:

The ability to reduce a bill is not necessarily an indication that bills are far out of proportion to costs incurred (though one has to wonder whether that is the case for other reasons). Many companies other than wireless companies routinely will permit negotiation of a bill downward just to get something on a risky debt. They may actually take a loss on those bills, but better a smaller loss than a complete loss.

The ability to reduce bills fairly routinely, on the other hand, is.

Regardless, I very much doubt it actually costs thousands of dollars to send a moderate amount of data to a nearby tower, then over fiber, just because the tower isn't near where the phone was purchased. Whether the carrier is gouging the user or is being gouged by some other company (other carriers? Some kind of tower company or backbone provider?) and passing it on, someone is gouging someone and it's the end-user that ends up with a ridiculous phone bill.


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