I wasn’t as fast as the typical Apple fanboy, but over the weekend I finally upgraded my iPhone 4 to iOS 5.0. Among other things, this means that any text I send to or receive from another iPhone will no longer count towards my $5 limit of 200 texts per month, because Apple will send it as data instead of through AT&T’s texting system. Over 3G the texts will instead count as a little bit of data, and when I’m in wi-fi the texts are now essentially completely free. My economic beliefs have led me to expect this event for several years, and even though it took longer than I expected, and did not take the form I expected, it is finally here. (Aside: I realize Blackberry has had a similar feature for some time, but I never had a Blackberry, and neither did most of my friends. The effects of the marketplace competition have finally reached me.)
Let’s back up a few years. Cell phones were cool, new mobile machines with this texting feature that people started using far more than a lot of people ever expected. Long before the spread of smartphones, it was a rare and luxurious privilege to transfer data over a cell phone network, and the demand was such that companies were able to charge a large amount for such a privilege. AT&T charged me ten cents for a handful of alphanumeric characters every time I sent or received them, and once I started texting past a level of 50/month (which added up to more than $5/month), I switched over to their $5 block plan of 200/month.
Then came the smartphones. There was a brief utopia where you could upload and download unlimited amounts of data from AT&T’s cell phone network for $30/month, but even now you can still transfer 200MB for just $15/month. Yet the texting plan has not budged at all. I can literally send thousands of emails in one month over 3G for that $15/month, but if I send a mere 300 texts I will get the same charge, even though texting uses far less data than email! In a post-smartphone world where cell phone networks proved they could handle several megabytes of data per dollar through one program (the web browser), it was simply inconsistent that they were still charging a dollar for mere kilobytes of data through another program (the texting software).
They were raking in huge profit margins on the prolific texters (even when you consider the cost of the unlimited plans and the amount of data sent by the average “unlimited” texter), and I expected competition among cell phone networks to start bringing this price down. You know, maybe Sprint or Verizon would say, alright, we’re going to start offering 300 texts a month for $5 instead of 200, and then AT&T would say, well hey we’re going to offer 500, and then US Cellular would offer 1000, and so on.
But it never happened. For whatever reason, the marketplace wasn’t competing.
Then suddenly Apple announced that their latest software update would treat texts between iPhones as mere data that would get funneled back into the texting program on the other side. This was brilliant! See, I knew that “texting” and “Internet browsing” were fundamentally the same kind of data that AT&T was sending to and from cell phones, but somehow they were able to charge much higher rates for one of them, and I kept waiting for competition from other cell phone networks to force them to bring that price down. But instead of AT&T equalizing the costs of the two data classifications, Apple came along and said, well, since it’s the same thing anyway, we’re just going to format our phones to send something that looks and acts exactly like the expensive “texting” through the cheaper “Internet browsing.”
I didn’t know why the cost of texting wasn’t dropping by 10 or 20 or 30 or 50 percent like I had been expecting, and then all of a sudden it dropped by 99.9%!
The History of Texting has some important lessons about the marketplace. Competition does not always take the forms we might expect, and it’s important for market proponents to admit this. Free market theory might suggest that if several companies are all selling the same product at incredible profit margins, some of the companies will start lowering their price to attract the other’s customers and increase their total profits. For whatever reason, that never happened with texting among cell phone networks (I could speculate about the reason, but I’m not knowledgable enough to make it worth my time). Sometimes their is friction in the marketplace.
But sometimes that friction is overcome. Competition still happened, but it was not among the companies I was expecting. This reminded me of Thomas Sowell’s discussion of apparent monopolies in his book, Basic Economics. You may think that the NFL has a monopoly on football, but they’re competing for the sports marketshare with the MLB and NBA and other sports. Furthermore, you may think that the NFL and MLB and NBA are competing for the sports marketshare, but the entire market is competing for the entertainment marketshare with movies, concerts, video games, and an infinite amount of other forms of entertainment. I was so caught up in expecting competition between AT&T and Verizon that I never even conceived that Apple could step in and radically alter the scene. And the end result was not only different than what I was expecting – it was better too!
That’s what makes the market such an exciting thing. I don’t think it’s written in the laws of economics that the market will always overcome friction. But just because you see friction doesn’t mean that the market is incapable of overcoming it. The victory may even come with a suddenness and force that you never saw coming.