The idea in a nutshell
The phone plan of the future will be no phone plan at all. Users will get network coverage by bidding competitively at the time access required. One bid might be ‘I want to make a 5 minute phone call now’ Another could be ‘I need 5GB of data this month’. The other side of the auction will be managed by phone companies, each of which will bid against each other, for the business. The concepts behind this method of pricing products are part of the basics of Economics taught at school and university.: A ‘Perfectly Competitive Market.’
Imagine if you installed an app and it managed your phone bill for you. You never had to worry about it, but overall, you ended up paying 50% of what you do now. Would you install the app ?
When this happens, it will be the final phone plan. No other plan would need to follow it – because it would offer the perfect, lowest cost, most efficient solution for phone users.
What is competitive market ?
Free markets have a number of constituent elements. These things have to be there before they can exist. They are listed below. The only one of these which is not in place now is ‘perfect information’.
- Profit motive
- A market ( a facility to allow the exchange of money and good / service)
- Perfect information
- No time lag
- No externalities
- Property rights
From what I remember (although it wasn’t included on the page I sourced this list from) no individual buyer or seller is supposed to be large enough to influence the supply (in this case of network access measured in minutes or GB), demand (In this case network access) and therefore the price.
The markets we usually experience approximate this sort of ‘perfect’ archetype because one or more of these things is either missing, or is in some way imperfect.
The way things work now, some of us are getting stuff for free
In simple terms that I remember from university (no doubt at least with some inaccuracies) A consumer surplus is the difference between what people would be prepared to pay for something and what they actually have to pay for something. Imagine a market for cameras, of 100 people, some of which love cameras and some of which don’t. Put them on a spectrum with some liking cameras more than others and everyone having enough money to buy one. In normal markets, Cannon make a camera, stick a price of $100 on it and everyone who likes cameras enough to pay $100 for them buys it.
In that group of people, however, there were some people who would have paid $110 for the camera. At a price of $100, they paid less than they would. A smaller number of people would have paid $120 for it. An even smaller number would have paid $130 for it. And so on. As price goes up, demand goes down.
This is pretty standard stuff explained well by economics online.
The corollary of a consumer surplus is a producer surplus. That’s the difference between what a producer would have been prepared to accept for the product they sell and what they did accept.
At the moment, in the market for phone plans, there are a couple of factors which work in the phone company’s favour.
Closed and open bids
The ‘market’ for cameras, described above, requires bids to initiate transactions. Bids come from consumers and can take one of two forms:
- A closed bid :
This is the sort you might put forward at a charity auction. When you submit your bid, you do so to the estate agent, who is representing the seller. Only they see all the bids.
- An open bid:
Is what you might make at a cattle auction : Where you shout ‘I’ll pay $50 for that cow’ and someone else says ‘I’ll pay $55’.
The way phone plans are sold is just like the way cameras are sold in the example above. There is no bidding mechanism.
This is very similar to the way Google price their ‘AdWords’
I remember reading, a decade ago, in a book which chronicled the rise of the company, that Google, at one point, was a great algorithm which was good at finding things on the internet but for which they had no business model. Interestingly, there’s not a lot about it available online. This is the best I’ve found.
To monetise their product, Google hit upon the idea of AdWords – the platform they use to sell the ads you see in a Google search. To figure out how to maximise their profits, they hired an economist to help them establish how they could make as much money as possible out of it.
To buy AdWords now, you need an AdWords account – and that account is owned by Google. In to it, you enter how much you are prepared to pay them in exchange for showing your ad (which comes down to a calculation of the profit you will make from someone clicking it.) Because Google run a closed bidding system, they are able to get (economists call it extort) the total consumer surplus in the market.
Imagine Google sold cameras. In this model, they ask each person how much they are prepared to pay for a camera. Only one person is prepared to pay $150 for a camera – so they sell him a camera at that price. Then there are 2 people prepared to pay $140 for it. They sell them that camera at that price. There are 5 people prepared to buy it at $130 – so Google sell them the camera at that price. And so on. It’s pretty clever stuff. In simple terms, there is literally no way they could make any more money out of us than they do.
What does all this mean to phone plans?
The market for phone plans is imperfect for 2 reasons :
- Consumers don’t have perfect information:
First, it takes time and expertise to understand the market for phone plans. Phone companies arguably make comparison as difficult as they can. Second, they don’t know their own usage information. Most people couldn’t tell you how many GB of data they used last month- or, for that matter, what a GB is.
- There is no facility for them to bid for the product:
Phone companies sell plans at a price point. They’re using the camera model, not the bidding model.
Importantly, it’s this lack of information that makes it seem incomprehensible to people that phone plans could be bought using the AdWords model.
How might the final phone plan work?
The only thing required to make the market perfectly competitive then is that those 2 imperfections are removed.
The first issue can be removed with an app which knew your phone’s usage information and payment preferences.
The phone companies have to opt in to the decision to bid for user data and minute requirements. However, it would only take a small number of phone companies – in theory two or three, to get things going.
Imagine 1 million Australians downloaded the app and were prepared to bid for their minutes and data requirements. Smaller phone companies wanting to grow their business could do so by bidding in this way.
It’s not nearly as unlikely as you might think. It’s starting to happen in the market for energy. Energy Action does it for high energy usage companies. On the retail side, Choice recently offered to solve the first problem (the lack of perfect information) for customers using people to act as the app and bid on your behalf. Uber’s surge pricing is a way of reflecting customer demands given Uber supply and charging at higher rates to extort the increase in consumer surplus that appears when people want to get home at night.
The eSIM, something I’ve written a lot about in this blog, will make this methodology trivial to achieve from a technical perspective.
In my view, it won’t be long before we have a perfectly competitive market for phone plans.