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Wireless Carriers Defend Text Message Pricing

AT&T and Verizon lawyers at a hearing on Capitol Hill yesterday vehemently denied any collusion in setting increased text messaging rates while defending marketing practices that include exclusive contracts with handset makers.

Wireless carriers were invited to provide testimony before the Senate Subcommittee on Antitrust, Competition Policy, and Consumer Rights at a hearing titled, Cell Phone Text Messaging Rate Increases and the State of Competition in the Wireless Market.

Subcommittee Chairman Herb Kohl (D-WI) last year raised the issue in a letter to the country's four largest wireless carriers asking why the text messaging rates of each of the four providers had doubled in the last three years and warned that consolidation in the industry could be undermining competition and providing the top four carriers with "a stranglehold on the market."

Kohl specifically wants to know why AT&T (NYSE: T), Verizon Wireless (NASDAQ:VZ), T-Mobile and Sprint appeared to be moving in lockstep in raising the per-message fee from 10 cents in 2005 to today's standard rate of 20 cents.

"Within weeks there appeared to be lockstep price increases, from 10 to 15 to 20 cents, as the cost for (offering) text messages is minimal, less than a penny per message," Kohl said in his opening remarks. "This appears to show a lack of competition in a highly competitive market … and may be a warning sign of the concentrated nature of the cell phone market."

"There's an underlying (theme) that we conspired to fix prices, and there's been a great deal of litigation filed, and I want to make it perfectly clear that AT&T sets prices based on independent analysis. There's no evidence to support any inappropriate, or illegal, behavior (in that regard)," Wayne Watts, senior executive vice president and general counsel for AT&T Management Services, said during the hearing.

Randal Milch, Verizon's executive vice president and general counsel, said in his testimony that it was "absolutely false" that carriers conspired to raise rates on certain types of text messages.

In regard to why the carriers would charge 20 cents per message when it costs them a penny or less to administer the service, both Watts and Milch said that pay-per-use texting represents a miniscule portion of texts they support each year, and that consumers are best served by a myriad of pricing choices in bundled plans. They also cite that prices vary from carrier to carrier in bundled plans, showing there isn't uniform pricing across the board.

In fact, Milch said that individual text messages not purchased through post-paid plans comprise less than one percent of the text messages Verizon administers.

He adds that because such a tiny percentage of customers use the pay-per-use plans, the company isn't gouging its user base, but supporting them by offering bundled plans that offer generous rates.

However, Joel Kelsey, policy analyst for Consumers Union, disagrees. He contends that carriers deliberately set the pay-per message rates high, so that users will sign up for bundles plans that are more expensive and often provide more services than they use.

"These prices are used to herd or 'price' consumers into larger plans that they don't need, they wind up paying more than they need to just so they don't get stuck with a high bill one month if they go over. This isn't competitive, it indicates there are inadequate pressures on the consumer," said Kelsey.

Kelsey also points to exclusive contracts and 'punitive' charges for consumers who want to switch services before their contract expires as barriers to competition, especially smaller companies trying to gain a foothold in the wireless market.

"If they're unsatisfied after they sign a contract, there are punitive charges to leave. And if the phone they have is locked into one carrier, they're also left with an expensive brick on their hands," said Kelsey.

To that end, he cited Asia and Europe wireless markets as examples of successful wireless markets where the device is sold apart from the carrier, as well as, for instance, how Dell doesn't have Internet access for its computers tied to just one ISP.

Right now AT&T is embroiled in controversy over its pricing plans for the iconic iPhone series, as it has the exclusive deal to carry the Apple handset until next year. Disgruntled iPhone users are balking at having to pay more than new subscribers to upgrade to the new iPhone 3G S if they are not eligible to break their existing two-year contract.

Milch and Watt, however, countered that exclusive deals are good for competition.

"What's left out of the debate [on exclusive contracts] is that prices on phones are affordable, exclusive arrangements drive down costs. Apple (NASDAQ: AAPL) is now charging $99 for the iPhone, that could not happen if the price wasn't subsidized by AT&T, and to do that, we rely on service contracts," Watts said. "Innovation is not hurt by this. Every phone company is spending money to create an 'iPhone killer.' Plug that into a search engine and you'll get millions of hits."

When asked why carriers didn't under cut each other on the 20 cent price for text messaging to gain market share, Milch responded by saying carriers have to keep in mind the cost of doing business.

"We're a multi-product firm, so we have to recover all of our costs," he said, adding that the company has to build expensive infrastructure for its network and switching centers.

Milch said the $233 billion invested by Verizon and others in the wireless industry through June 2007 is "evidence of fierce competition to offer customers better-quality, higher-speed data services, and new or improved technologies such as GPS, video, music, picture messaging and many other services."

The Verizon executive said that investment, combined with light regulation, is resulting in more jobs and productivity, as well as increased choice and customer satisfaction.

"The wireless industry is a great success story," Milch said. "And I urge Congress to let it remain one."