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GROUP 4

VINAY JAIN
TEJASHWI KUMAR
UDAYAN ANAND
MADAN LAL
DEEPESH KUMAR
SAWATKAR VAIBHAV
AJAY
VIJAY MURALI

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Introduction to the Case

The bank Charendoff worked for had a client who wished to investigate the future growth of
the wireless industry

It was reported that some operators received 20 per cent of their revenue solely from text
messaging, an application that generated roughly $60 billion a year in revenue worldwide

Psychologists and physicians had expressed concerns over the excessive use of text
messaging, claiming it could result in anxiety, distraction in school, sleep deprivation and
repetitive stress

In 2009, the number of text messages increased nearly 50 per cent and, for the first time ever,
the amount of data (texts, e-mails and other services) actually surpassed the number of
voice minutes

The media had covered hundreds of news items alleging that carriers had conspired to fix text
messaging prices. This allegation was the basis of the antitrust argument behind the classaction suits.

Q1: Describe the cost behavior in the wireless industry. What are
the implications of this cost behavior for cost-volume-profit (CVP)
relationships?

Cost behavior means how companys total cost changes with change in its operating
activities

Companies like AT&T have huge fixed costs and low variable costs

High Operating Leverage due to high fixed cost due to which higher returns with greater
volume

For text messages in particular, low variable cost meaning higher profit margins

Q2: What does it cost AT&T to send a text message? Based on


this cost, what is AT&Ts profit margin as a percentage of its
short message service (SMS) text messaging business?

One way of looking at text messages is that it is a free-rider in terms of fixed costs since no
additional infrastructure required for text messaging alone

However, Channel costs, Billing Costs, Storage costs to be considered

As per Channel Costs, for voice calling, it was $0.07 per minute. If Channel was at maximum
utilization, then 420 messages possible, since only around 20% channel utilization,
approximately 81 text messages per minute

Billing Costs approximately can be assumed as twice the channel costs as per Charendoff

Database Costs is $10 million and total wireless traffic is 3.5 trillion of which 1% can be
attributed to AT&T

Storage Costs was $1000 per terabyte and total wireless traffic required 1353 terabytes

Q2 Continued: Calculations and Gross


Profit

Net Cost per Unit message:


Cost Incurred per Unit Message
Channel Cost

0.000864198

Billing Cost

0.001728395

Database Cost

0.000285714

Storage Cost
Total Cost

0.00000038657
0.002878693

Profit Margins:
No of Messages

Plan Price

Price/message Profit Percentage

0.2

0.2

98.56065328

200

0.025

88.4852262

1500

15

0.01

71.2130655

Question 3
How strong a relationship should exist between the price
charged to a customer for a good or service and the cost of
providing that good or service

No fixed percentage as it varies from company to company and


depending on the organization goals

For AT&T, we would suggest that it should price its products in such a way
that it at least recovers its total costs(fixed + variable)

Since there is huge demand for text messages and very little variable
cost, technically they can charge high prices and customers might even
pay but that will create a negative image for the organization which will
hurt it in the long run

In the future, if they come up with even a minimal pricing then people
wont believe that and they may find it very difficult to get new customers.

Question 4
What issues related to the wireless industry might be of interest to the
U.S. Senate Antitrust Subcommittee?

Wireless Companies together raised the prices of text messaging by 200%

Since text messaging was very popular, wireless companies made much
higher profits

Low Variable Cost incurred by Wireless companies and as per Prof.


Srinivasan Keshav, a text message cost only around $0.3 cents

Hence, debatable whether increase in text messaging prices was justified

Question 5
Why is the price that AT&T charges to transmit a kilobyte of
data via text message so much higher than the price charged
to transmit a kilobyte of data via a smartphone?

Text messaging demand was very high and profit margins obtained from
this can possibly be used to cover expenses incurred on wireless

Hence, for data, wireless companies could charge only as per the variable
cost incurred since no additional infrastructure required for the same

20% of channel is only utilized for Text messages which means the others
can be utilized for data/voice calling

Higher text message prices required to cover total capital expenditure from
1998-2003 consisting of $20,186 million

Question6

What does it cost for a cellphone company


to send or receive a text message?

Each text message travelled via two wireless paths and a wired network

Wireless Costs required to be calculated per text message whereas wired


network costs not so important

Storage Costs for messages from source and for those which were not sent
correctly

Billing and Location Database costs

Maintenance costs required for Cell towers and other infrastructure like
control channels

Question 7
What are the key cost drivers?

A cost driver is the reason why a cost occurs

The various cost drivers in this case are the number of customers, number
of texts sent per minute, number of cell towers in the area, storage
needed to handle the messages, individual cell phone plans, number of
devices that are currently handled by a carrier in a given area

The main cost driver in this case is the number of texts sent per minute.

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Question 8
What kinds of margins does text messaging produce?

Coming to an exact figure is a difficult task since majority of the


infrastructure is shared by many services. To get the margin we will need to
first allocate the costs.

The fixed costs such as servers need to be divided in the ratio 90:10
because the bandwidth used by text messages is very low

The remaining costs should be divided equally because the income from
both the operations are almost equal

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Question 9
As we move to a service economy, can we expect to
have more or fewer businesses with cost behaviors similar
to those in the text messaging sector?

It is expected that we will have more businesses with the cost behavior
similar to those in the text messaging sector because it is hard to find out
when the services start and when they stop

Billing time becomes an issue and recording is much more variable in the
service industry

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Question 10
What should the management of wireless firms seek to do
now?

We would suggest an unlimited text messaging packet for a reasonable


price of around $15 per month

We would also keep a limit on the number of voice calls

The is almost similar to the packages available and they seem to be pretty
reasonable given the information provided and cost structures in place

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Question 11
Who is the best kind of text messaging customer?

Data Services price is much cheaper when compared to text messaging


and hence lesser profit margin from data than text messages

Hence, those customers not using smart phones and still reliant on text
messaging would contribute the highest

Also the customers who subscribe to a particular plan and dont use it
completely are the kinds of customers who will be really benefecial

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