Eventually, Service Providers Will Price by Value

There are some very-practical implications to the notion that telecommunications now is a multi-product business.

Profit margins (net income divided by revenue), varies widely by industry. Grocery stores have margins in the six-percent range, while banks have margins as thin as two percent to three percent.

Many would note that profit margins for text messaging are quite high, in fact, almost arbitrarily high. One reason is that text messaging is a feature made possible by the out of band signaling digital voice services require. In other words, short message service actually is possible because it is part of the other signaling activities the voice network has to support, anyway.

That means it is mostly an accounting exercise to determine what text messaging profit margin actually is.

One issue is that it matters how people pay for use of text messaging. Many have flat fee plans for an unlimited number of messages, so profit margin arguably could depend on the number of messages sent, though messaging cost is relatively insensitive to volume.

You might argue that a user on a per-message plan, paying 20 cents to send a message up to 160 characters in length, is paying, for the use of bandwidth, at about 100,000 times more than the per-byte rate of a typical consumer access plan, by some estimates.

That isn’t really the point, though. Few products are absolute commodities, and few products are priced strictly according to cost of production. In fact, one characteristic of highly-branded luxury products is that retail pricing is set more on intangible factors (demand) than the cost of production.

Also, any multi-product retailer typically sells products with varying profit margins. That increasingly is true for communications service providers as well.

By some estimates, though gross profit margins averaged 86.51 percent for the telecommunications industry in 2010, net margin was only about 10.99 percent, on average.

Assuming industry-average expenses, a reasonable profit margin would be anything between 10 and 15 percent.

Of course, little in the telecom business is “average.” Without various subsidies, small rural telcos would consistently lose money, overall.

Also, profit margins vary dramatically by product. Text messaging margins are almost arbitrary, and can in principle feature margins of 80 percent, though margin is dropping.

As communications now is a multi-product business, including mobile voice, texting, mobile broadband, machine-to-machine services, fixed network broadband, voice, video entertainment and business services, with important new lines of business being built in other areas, executives and managers must contend with many lines of business, each with a different gross revenue contribution and profit margin margin.

In part, communications service providers actually do sell “raw bandwidth,” in the case of consumer high-speed access, where government regulations do not permit any packet prioritization or other quality of service measures.

But service providers also sell applications and features. Assuming it eventually recognized that consumer welfare, service provider health and investment require revenue that is matched to cost and value, we should see the development of retail pricing that sometimes is paid by the end user, sometimes is paid by a third party advertiser or app provider, or sometimes is paid by a combination of advertising, end user fees and third party payments.