Charendoff-Wireless Services

Charendoff, an investment banking analyst, is assigned the task of preparing a report based on the current state of wireless services to aid investigation of potential growth in that industry for a client. The analysis required her to track down the cost to a wireless provider to send a text message. This was due to the recent increase in popularity and volume of text messages in particular and data, which included emails and internet, in general.

The increased volume of text messages was coupled with rising prices over the past few years. Given that the US wireless industry was dominated by an oligopoly, the debate remained as to whether the wireless carriers colluded to set prices or if the increased text usage affected its costs and translated into increased or decreased costs. Due to lack of confidential information on the cost behavior of these companies, she had to estimate the per text cost on her own.

To begin with, Charendoff conducted a retail price analysis to reach the maximum cost of a text message but knew that this was an over-simplistic method since it would not account for average usage of text messages and without any knowledge of margins, it could never be close to.

Moving from this model, she stumbled over the fact that transmission costs for sending and receiving text messages were negligible for the company (given the small size of a text message) once they had incurred the initial cost of setting up the infrastructure and equipment. This meant that transmission of text messages caused minimal or no incremental costs with increase in volume of text messages and hence all of the incremental revenue could be seen as profits. However, a zero cost text message could not be the answer to her question since there were many technology related costs that were not accounted for. Among these were the costs to store messages for unavailable recipients, billing costs, cost to increase infrastructure for volume beyond a specific range, and others.

Charendoff knew that she would have to analyze the technology behind text messages in order to reach her goal. She learned that mobile devices get wireless support from their associated cell towers which in turn are connected by wired links to a wired network backbone. This backbone