Why Are Cell Phone Bills So Expensive In The U.S.?

I pay $61 a month for three gigabytes of data. Every month, I pay $80 for my cell phone bill. Every month, I pay around $100 dollars for my AT&T plan. Every month, I pay about $200 for my cell phone bill for my family. The average American spent $1,218 for cell phone service in 2019.

That comes out to just over $100 per month. And when you isolate just Americans between the ages of 25 and 64, that average monthly spending jumps by about $17. Ryan Reynolds believes this is not acceptable, and it’s one of the reasons the actor bought Mint Mobile, a cell phone company which aims to disrupt the $280 billion-dollar wireless carrier industry.

People all across America pay too much for wireless. Our biggest hurdle is that, you know, people literally do not believe that Mint Mobile can be as good for just $15 dollars. You know, the wireless industry’s conditioned us all to think that if we’re not paying $100 a month for wireless, that it can’t be any good. Wireless is an essential service, you know, and it doesn’t have to be that way.

TELECOM INFRASTRUCTURE

Before we get into the details of cell phone service prices, it’s important to understand how our cellular system works and the costs involved in making it run smoothly. It all starts with the electromagnetic spectrum. In the U.S., the FCC is responsible for dividing up the radio portion of the electromagnetic spectrum for commercial use, as well as for use by state, county and local governments.

The name radio is a little misleading, as this portion of the spectrum is used for all types of communication technologies, including television, cell phones, and, of course, radio. The FCC has to act as a gatekeeper because the radio spectrum is a limited resource and we are quickly approaching its limits. Basically, if two phone carriers were to use the same frequency at the same time, their signals would interfere with each other.

To prevent this, phone carriers bid for licenses from the FCC to use a specific frequency on the radio spectrum. And they in turn make those airwaves available to their customers. Competition for that spectrum when it becomes available is intense. And so the prices tend to get bid up to an enormous level. U.S. cell phone carriers are currently in a bidding war over the part of the spectrum that works best with 5G. The auction proceeds, which go to the U.S. Treasury, are already close to $80 billion.

When the new spectrum that’s being auctioned at the moment is deployed, you’ll notice a tenfold increase in the speed that your phone can deliver. And the distribution of the spectrum in this auction will really shape the competitive dynamics between the carriers over the course of the next 5 to 10 years. In the U.S., the three largest phone carriers are Verizon, AT&T and T-Mobile. They use a total of about 154,000 phone towers across the country. But the phone towers are just one piece of a much larger network.

On the cell tower, the carriers are going to place radios and antennas. And at the base of the tower, a base station that both transmits the signals from the cell tower to the handset and collects the signal from the handset back to the cell tower. The next piece of fiber.

All of those cell towers need to be connected into a core network that ultimately connects them together with fiber. That fiber connects into a network operation center where a lot of the intelligence of the network resides. That’s where the network is controlled. The final piece of the network is the handset, the cell phone or the terminal at the edge of the network that is receiving and transmitting signals to the network. Ownership of the network is somewhat divided. The phone carriers own the equipment on the towers, but at lease the towers themselves from independent companies like American Tower and Crown Castle.

Verizon and AT&T have some of their own fiber infrastructure and lease the rest, while T-Mobile leases all of its fiber infrastructure. With all this hardware, costs quickly add up. The top three carriers spend about $10 billion a year on capital investments in their networks. That’s going into infrastructure to make the networks work. And you’ve probably got between $10-$20 billion dollars of additional spend per company in operating expense. keeping these networks functional. With the arrival of 5G, phone carriers are doling out even more cash to upgrade their networks. But experts say consumers probably won’t have to shoulder that cost.

Currently, none of the big carriers are charging extra for 5G. I don’t think cell phone bills are going to go up all that much as a function of all the investment that we’re seeing in 5G. And the reason for that is because we’ve got a competitive market. And so price becomes a major factor that decides which carrier you go with. And the discipline that’s created by that competition prevents prices from rising too much.

INDUSTRY PLAYERS

In addition to the big three phone carriers, customers in the U.S. can choose to go with an MVNO or a mobile virtual network operator, which don’t have their own cellular networks. They buy capacity from one of the big three operators and then resell that capacity to end users. And they collect a very narrow margin.

The list of MVNOs in the U.S. is long, but some you may have heard of include Boost Mobile, Consumer Cellular, Straight Talk, Mint Mobile and Google Fi. Unlike conventional operators, MVNOs generally offer customers cheaper, prepaid, month-to-month plans. Actor, Ryan Reynolds, decided to invest in Mint Mobile in 2019, after having a positive experience with the company.

As a customer, I have a lot of employees that travel and move around with me a lot, and I pay for their cell phones. I tried Mint. It was amazing. I tested it through fire first and then became an owner of the company. I come to the industry with pretty fresh eyes and I tend to look at the company, I tend to look at the experience in the same manner a customer would. One of the things that Reynolds says sets Mint Mobile apart is that the company will actively recommend a lower gigabyte plan to people who don’t use up all of their data.

It turns out the average American only uses 6 gigabytes of data. But people love having unlimited, so wireless companies use it as a way to increase revenue. Not at Mint, not on my watch. Mint Mobile runs on T-Mobile’s network and offers one of the cheapest unlimited plans on the market for individual users — $30 a month for 12 months. And the company’s cheapest 3-gigabyte plan costs $15 a month for 12 months. Verizon, AT&T and T-Mobile also offer unlimited plans for around $30 a month.

But unlike T-Mobile, you have to get multiple lines. Like most cell phone carriers, including the big three, Mint Mobile will reduce data speeds for very high data users. The company says it can offer low prices by selling plans in bulk and cutting out extra costs that come with having a physical footprint. In 2015, Google also decided to break into the MVNO space. Google getting into the wireless industry here with a service that they’re going to call Fi, F-I. What you get for a flat fee of $20 per month is the basics. You get talk, text, Wi-Fi tethering, international coverage in 120+ countries. Then beyond that, you buy your data usage and it’s $10 per gigabyte.

Since 2015, Google Fi has expanded to over 200 countries and added an unlimited data plan, which costs $70 a month for one month. But unlike with Mint, Google Fi offers family savings. With enough people, the price per line can go as low as $45 a month. Like Mint, Google Fi will also slow data speeds for customers who use a ton of data per month. Google Fi bounces between the networks of US Cellular, T-Mobile and what used to be Sprint.

As of April, T-Mobile and Sprint merged and T-Mobile is in the process of taking over Sprint’s network. Google says that using more than one network ensures that customers have better coverage and higher data speeds than other MVNOs. But there is a caveat. In order for phones to automatically bounce from network to network, they must be designed for Fi. This includes Google’s Pixel phones, as well as some Samsung, LG and Moto models, but not iPhones, which only run on T-Mobile’s network.

Another caveat Google Fi does not currently support 5G for iPhone users. Generally, when you go with an MVNO, you’re giving up something that you would be getting from the national carrier that makes up for the difference in price that you pay. You’re either getting a lower network quality, you’re probably not getting a subsidy for your handset. You might be getting higher speeds at certain times of the day, but it speeds throttled down to much lower levels at peak hour. This slowing down of speeds is known as DE prioritization. So, for example, even though Google Fi and Mint Mobile both use T-Mobile’s network, during times of congestion, the idea is that T-Mobile will prioritize its own customers before those of the MVNOs.

When asked about this, Google told CNBC that its Fi customers have the same priority as retail users from major carriers. Reynolds also said it’s not a problem he’s run into. I have never experienced lag times or anything like that. My experience has been better than when my business was with one of the big major carriers. A 2019 Study by Tutela, an independent company that uses crowdsourced data to measure the quality of mobile providers, found that the majority of MVNOs in the U.S. offer quality that closely mimics that offered by the big three. For the purposes of this study, an ‘excellent’ connection refers to one that’s sufficient for things like 1080p video streaming or multiplayer gaming.

A ‘core’ connection is satisfactory for SD streaming, social media use and web browsing. A sort of intermediate between pure MVNOs and conventional phone carriers are cable companies, which also offer phone services. These include Xfinity Mobile and Spectrum Mobile, both of which piggyback off of Verizon’s network. If you’re looking for an MVNO or an alternative to the big three and you don’t want to give up on quality of service, the place to go is to the cable companies.

They can make money by giving you essentially the same network that you buy from AT&T, Verizon or T-Mobile today at a lower price by bundling it together with the services that they already give you.

WHY THE HIGH PRICES?

INDUSTRY PLAYERS

As customers find more and more ways to use their smartphones for things like streaming video, cell phone companies have to spend a lot of money maintaining and upgrading their networks. But that’s not the only reason American’s cell phone bills are so pricey. Since 2008, average monthly wireless service bills have dropped 26 percent. But wireless taxes have increased 50 percent. And that’s why customers aren’t seeing savings.

Experts estimate that American consumers will pay $17.5 billion in wireless taxes, fees and government surcharges to federal, state and local governments in 2020. Taxes, fees and surcharges make up 22.6 percent of the national average bill. The largest portion of this comes in the form of FUSF surcharges. The Federal Universal Service Fund, which is something we all pay into, it’s administered by the FCC. And what it does is, it pays for broadband and pays for phone services in some rural areas where it may not be profitable to offer these services.

Part of the reason the taxes on cell phone bills are so high is because of the Tax Freedom Act, which forbids states, localities and the federal government from taxing internet access. Back in the day, states used to get hundreds of millions of dollars by taxing landlines, but with people increasingly ditching the home phone in favor of cell phones, states have tried to close the gap by levying massive taxes on the voice and text portion of cellular plans, which are not covered under the Tax Freedom Act.

In some cities across the nation, taxes on wireless phone services comprise close to 30 percent of consumers’ monthly bills. In Chicago, that ratio balloons to nearly 40 percent. But Boesen thinks that this trend of rising taxes can’t continue forever. I think what we’re seeing in some states and localities is that maybe they’ll need to find new taxes elsewhere. These new taxes, Boesen believes, may come from online communication tools like Zoom or Skype, which have become paramount for remote work and staying connected to family and friends during Covid.

For example, since November, California, New York, Maryland and Virginia have required Zoom to charge some customers local communication service taxes. But taxes aside, another reason Americans spend a lot is because they use a lot of data. For a family of four, it’s probably 40 to 50 gigabytes and your friends in Europe are at half of that or less. On average, the more usage on the network, the more carriers have to invest in the network to make the capacity available for you to use.

The more it costs them, the more it costs you. If you look at what users in the U.S. pay per unit of data, it’s actually not more than most markets around the world.

LOWERING YOUR PHONE BILL

INDUSTRY PLAYERS

Experts say that rethinking the structure of the FUSF is something the incoming administration will need to address, as taxes on phone bills in many parts of the country are becoming unsustainable. Chaplin says the issue has been under discussion for years, but change is difficult.

Telephone companies that provide service in rural markets are often big employers in those markets, and so have a lot of sway with senators in those markets, that ultimately have sway over the FCC and how policy is formed. While policy may eventually provide some relief, experts say there are few things you should consider when deciding which phone plan is best for you. Activities like video and audio streaming suck up a ton of data.

So if you’re big on watching shows or listening to podcasts on your usual, non-Covid world commute, you might want to go with an unlimited plan. But if you mostly use your smartphone to browse the web or send the occasional email, you might save some money by going with a limited data plan. And of course, you can always look for Wi-Fi to avoid eating away at your data. That’s when it becomes possible for you to consider one of the MVNO options out there where you can buy one, two, three, four gigabytes a month instead of paying for unlimited usage.

Chaplin says that only about 20 percent of the data that people consume goes over the cellular network because most of the time we’re in a place where we have access to Wi-Fi, like our office or our homes. The reason that that’s so expensive is because the infrastructure required to cover that 20 percent of traffic is enormous.

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