Taxing the text message – the view from the telecom trenches

So cheap?
So cheap?

The proposed tax on text messages

The lower House has proposed a 5-centavo tax on text messages.  The reaction from the two largest telecoms is to oppose on two grounds.  One is based on the fact that the actual price of a text varies, and they threaten to withdraw their “promo” plans which set the price of “within network” texts to free or almost-free.  The second is that the proposed tax is “oppressive and confiscatory,” and thereby unconstitutional.

The views of the two largest telecoms

As reported in Malaya, PLDT, the largest telecom said:

… the imposition of the tax on SMS will destroy and obliterate the bucket-priced plans such as the very popular unlimited text plans since the tax is imposed on each SMS. …  SMS will revert to standard pricing which will not serve the needs of low income earners.

Similarly, Globe, the second-largest telecom said:

The days of unlimited and free SMS will be numbered. Consumers can bid farewell to today’s highly affordable and widely available mobile telephony that we have come to embrace…

Effectively 25 percent of all SMS handled by Globe are either free or effectively zero-rated under unlimited or other offers; and only 9 percent are rated at P1 per text.

Under Globe promos a text may cost only 10-centavos or even less. Imposing a 5-centavo tax on a 10-centavo text is certainly oppressive and confiscatory thus unconstitutional.

What does it all mean? And what don’t we know?

The statements of PLDT and Globe are an admission that a text message costs the consumer less than 10 centavos on average under present pricing practices.

The two industry leaders have now given a common view that they would price texts at P1 if the tax is enacted.   If such pricing were to prevail, the profits of the telecom industry will fall, and not just because of the 5 centavo tax.  It would be interesting to know by how much.

It is certainly true that the low-income users of cell phone text messaging will suffer if the price of text were to be uniformly P1.

Legislators reportedly believe that the 5-centavo tax would yield up to P36 billion.  This is possibly a simple calculation based on gross revenues of P720 billion.  But if there are some 70 million phones texting an average of 100 messages per day, there would 7 billion texts per day and 2.5 trillion texts per year.  If the 5 centavo tax were imposed on such a volume of texts, the annual revenue yield would be P125 billion.

What accounts for the difference?   It seems that only the telecoms know the answer, since they have more precise data on actual volumes of texts, and they also have an idea of how much the demand for text messaging will fall with the imposition of a 5-centavo tax.  Public hearings in Congress would perhaps shed light on these factual issues.

The telecoms are claiming that consumers will suffer tremendously if the tax is imposed.  The claim is tantamount to saying that the tax will be passed on to the consumer (by how much is unclear).  But this “suffering” is based on their threat to revert to flat P1 pricing.

But what happens if the present pricing practices are maintained?  The telecoms have not actually said that they would become unprofitable.  Again, this question seems to be a fair one for public hearings.

What will really benefit the consumer?

In an earlier post, I estimated that the telecoms would remain profitable even if text messages were priced at 5 centavos.  But I did not advocate that the government should step in and tax text messaging.  It would benefit the consumer if the government were to encourage even more competition in the cell phone industry so that the actual price of text messages would be cut by about half every year, in accordance with Moore’s Law (which states that the cost of computing — and cell phones are essentially one large computer system — falls by half each year).

And if text messaging were to become free or essentially free, it is something that ought not to be taxed for the practical reason that there is no “tax base” on free goods.  It would be similar to a tax that would be difficult to impose on consumers when they watch network television, which is free to them because of advertising.  The consumer eventually pays for television programs when he buys the product advertised, but that does not seem objectionable.

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3 thoughts on “Taxing the text message – the view from the telecom trenches

  1. so far this has been the most sensible and emotion-free observation i’ve read regarding the issue. i may not be a chronic texter but i do appreciate the value of texting, however, i wouldn’t want to be so jaded as to be swayed by whatever the telcos operators are saying, remember, they are all for profit.

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    1. For profit they are, but the telcos admit that they run a “race to the bottom” with their “unli” text plans within networks. For them, the marginal cost of a within-network SMS is already zero, which means any price above free produces a profit. In any case, they also profit from voice calls and international SMS, as well as junk text ads. It would be nice if the consumer were to be given, say, ten free SMS each time he gets an unsolicited SMS ad.

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