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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
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
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
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
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
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?
Since text messaging was very popular, wireless companies made much
higher profits
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
Each text message travelled via two wireless paths and a wired network
Storage Costs for messages from source and for those which were not sent
correctly
Maintenance costs required for Cell towers and other infrastructure like
control channels
Question 7
What are the key cost drivers?
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?
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?
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?
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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