Saturday, August 15, 2015

Telecom Services are Digital Products, With "Digital" Economics

There it is, again: marginal cost pricing. “Carriers have already sunk a lot of expense into 4G LTE network upgrades (including purchasing spectrum licenses), and now the biggest portions of these costs have been paid,” argues Glenn Fleishman, Macworld senior contributor.

There is room for debate about about the financial truth of that notion.

Capital has been invested. The networks are built out and operating, and there are scores of millions of customers loaded onto those networks.

Whether the mobile carriers have yet recouped all of the invested capital might be a subject of some debate.

But it certainly is true that the cash spent to build out the networks is generating recurring service fee revenue. And, as Fleishman notes, “ their network infrastructures have been largely built out, and their current costs won’t increase much with additional customers or data usage.”

So what will service providers do to take customers from other providers? To the extent possible, they will price not at full “recovery of capital” levels, but on the incremental cost of serving the next customer.

Such marginal cost pricing happens in markets for digital products. And communication services are digital products, subject to all the economies any other digital application experiences.

So pricing will trend, over time, towards marginal cost. And what is the marginal cost of the next message, the next phone call, the next megabyte of usage? A number so small it is hard to measure. Or, as I call it, “near zero” pricing levels.

As always is the case, “price” and “cost” are different things! So the retail price might not actually reflect “cost” so closely. But the actual marginal cost of the next unit is quite literally “near zero.”

So something more than “mere competition” is at work here. The structural reality is that a digital product’s retail price trends towards zero.

That is the long-term structural reality of telecom service pricing.

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