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Making Peace with the Phone Bill

Sure, long distance costs are way down, but the typical household now spends vastly more on communications than before. MIT management professor Thomas Malone explains why that’s actually a good thing.
October 13, 2004

In his recent book, The Future of Work, Thomas Malone argues that continuing reductions in the unit cost of communication are changing the face of business, leading to decentralization, innovative use of markets, and eventually, workplace democracy. (Yes, if youre lucky, youll soon be able to fire your boss.) Malones book is an intriguing vision of the future, and the extensive footnotes show he has done his homework. Still, from the point of view of one of the e-lancers (he co-invented the term in the late 1990s) who are driving the new new economy, I had to ask: what lowered communications costs? Sure, if youre a CFO, you may be thrilled that the cost of corporate voice and data services continues to plummet, but if youre sitting at home, all you see is one communications bill after another.

Twenty years ago, when the Bell System formally closed down shop, a consumer household that made a fair number of long distance calls may have paid $80 or $90 a month for phone service in todays dollars, plus another $10 for paper, stamps and envelopes. Grand total: less than $100 for your households entire communications budget. Today, thanks to fiber optic communications and deregulation (sort of), you might pay closer to $50 for unlimited local and long distance. So far, so good. But you surely own a cell phone as well, so at another $50 apiece thats about $100 for a two-adult household–and maybe more if you anyone else over the age of 12 is living in your house. Then add another $50 a month for broadband Internet access, and youre up to about $200. But wait–youve probably got an extra service or two, such as cellular Internet access, text messaging, pager, or paid Wi-Fi access. And then there are all those activation fees and hardware costs to factor in. In the end you could easily be paying $200 to $250 a month, more than twice what you paid in the bad old days of high communications costs.

Whats going on here? After discovering yet another special handling fee on my landline phone bill and more roaming charges from my cell provider, I decided to ask Malone himself. After all, hes the Patrick J. McGovern Professor of Management at the MIT Sloan School of Management, not to mention the guy who way back in 1987 predicted the phenomenon we now know as e-business. If he couldnt give me the answer, it was hopeless.

Malone was very consoling. Sometimes its easy to lose sight of the big picture in the day-to-day details of one bill after another, he said, but what I’m talking about is the long-term picture.

For starters, he reminded me, he was referring to the unit cost of communications dropping, not the total cost. When the unit cost of something goes down, people usually buy more of it, he said, going on to explain that this “elasticity of demand” is unusually high in todays telecom market. Its so high, in fact that when the unit cost goes down, people buy so much more of it that their total cost actually increases.

That was a calming notion, but it wouldnt help me pay my bills. Big picture, he reminded me again, and I settled. Todays freelancers have cheap and easy access to many orders of magnitude more information than they did in the 1980s, he said. They have flat rate long distance and can take and receive calls wherever they are. They can send e-mail to as many people as they want for free and find information in seconds that, if it could be found at all, would have taken numerous phone calls and letters. In fact, in many cases, freelancers have access to better information than was available to the most senior managers of GM, IBM, and the U.S. government back in the 80s.

Fair enough, I thought after awhile, and in fact, most of those statements applied to regular old consumers as well. But that still didnt explain who was going to pay for my

Voice over IP is the next step in the progression I’ve talked about, continued Malone. It is replacing a previous generation of communication technologies with a newer generation that is even cheaper and more powerful.

Thanks, professor, I said, hanging up the phone. That was answer, I told myself: cheap, IP-based telephony delivered over my broadband connection. Sure the quality wasnt perfect, but it beat cellular, and who needed 911? I would just learn CPR. I quickly checked out the latest VoIP price drops from AT&T CallVantage, Vonage, and the others. But wait, perhaps I should wait for these newly announced VoIP services to come out from America Online and EarthLink and the cable companies. I might even risk one of those peer-to-peer Skype connections everyone was getting. Could this be right, over 22 million downloads already? Hey, you cant get any cheaper than free!

Malone was right after all, I thought. The costs really were coming down. And jeez, I thought to myself, just think how long this research would have taken me 20 years ago! Im an e-lancer, I reminded myself. Im good enough, Im smart enough, and doggonit, I can pay my phone bills.

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