Interview with John Hempton/Bronte Capital

[frommi]

With all the security, etc, I just can't see people using wifi. I don't use wifi,  it's slow and takes forever to login , etc... Time is valuable, and I don't have it!  It really comes down to wireless broadband...

 

I was talking about the very long term, perhaps >10 years away. I don`t know if we call it wifi than, but i am sure that we someday have a technology that just spans a network of small connected units like a peer to peer network with small independend stations for every home. When this time has come, telcos will play a minor role and internet access/mobile/phone is free for those who can run a station. Perhaps i am a bit utopic here, but the future always is. 

[gary17]

perhaps....  wait until that paper says wireless waves cause cancer or affect childhood development -   

[Liberty]

perhaps....  wait until that paper says wireless waves cause cancer or affect childhood development - 

 

You'll be waiting forever for that paper. We know how radio waves work, we've been using them for a looong time before wifi came around.

[txlaw]

It is interesting John has this thesis that the telcos will get good pricing power moving forward - I am wondering if anyone else on this board has thought about this? 

 

His argument is that due to the engineering limitations, it won't be possible to have an infinite number of cell towers to supply the demand for boradband wireless data in the next decade.... and as a result...  telcos will have the ability to raise their prices.

 

i quickly checked my cell phone bills  - seems like there is some truth to that.  i am wondering if others agree with this observation.  Are there any experts in telcos here (Packer? and others... ? )  that could weight in on this?  Thanks    Gary

 

I listened to Hempton's thesis.  It's shockingly simplistic.  Ultimately, he boils down his telecom investments to this "engineering question" of whether there are limits on data transfer capacity, but that's a very uninformed way to view the telecom space. 

 

Data transfer is a commodity business.  And anybody who knows anything about the communications industry understands that the unit cost to transfer bits is constantly dropping and capacity constraints have more to do with economics than technology.  Thus, while there are spectrum capacity constraints based on current technological limitations, market structure, and the regulatory regime (as of now, much of the best spectrum for wireless data transfer is controlled by a few companies who have acquired rights from the government and through M&A), the absolute capacity to wirelessly transfer data is really not an issue over the long run.  In the US, pricing power in the wireless market has resulted from the duopolistic market stucture (can't speak to other countries), and there are signs that this market structure is finally starting to break down as a result of increased competition from all types -- strengthened traditional foes (e.g., S and T-MUS), the MSOs (Comcast, Charter, etc.), satellite co's (e.g, DISH), white space providers, big tech, etc.  As technology evolves, there will definitely be increased competition, and you could start to see a transformed market where consumers are able to hop on and off different providers as necessary.  At that point, the low cost providers have the advantage, but there is no pricing power.  Bottom line, Hempton is confusing the benefits associated with last mile monopolies and network effects with capacity constraints.

 

He had better watch his butt on the downside.  First, focusing on P/E is a bad idea in the telecom space, and you have to have some idea of what owner earnings are versus GAAP earnings.  Second, the fact of the matter is that these companies are the ultimate fixed cost companies, and they live and die by operating leverage.  That is, if $1 of revenue goes away, you might see something like $0.80 of profit go away.  The reason why a lot of telecom companies trade for what appears to be low multiples is that there are substantial threats to their revenue bases, and they're investing like crazy (in many cases, what appears to be "growth" capex is really "maintenance" capex) to replace this revenue.  So you can't look simplistically at the surface numbers.  Third, there is no guarantee that their investments will pan out, especially when they put money into new business lines where they do not have a core competence.  Fourth, telco companies tend to have high financial leverage as well, which can be very problematic if the utility revenue base transforms in a rapid manner, which is the threat that these guys face.

 

Also, one hugely important fact -- the communications industry is one of the most highly regulated industries there is.  Therefore, the prospects for a biz can be vastly different based on the regulatory regime in which one plays.  You can't assume that what goes for a US telco will play for an Indian or Turkish telco, for example.  So having a general thesis on global telecom is a bad idea, IMO.

[gary17]

thanks txlaw for your insight on this -

 

i have a simplistic view on this as well - perhaps overly simplistic.

 

i think over the next few years we are likely going to just have wireless providers and content providers for the general consumer &  wireline will just be for enterprise....

 

wireless coverage & capacity seems to have a lot to do with installing cell towers & their back haul connections; and there is a cost associated with that.

 

if i already have a certain market share in an industry....  and so are my competitors, would i want to spend a whole bunch of money so i can gain a bit of market share, but at the risk of losing my pricing power? 

 

i agree the absolute capacity is infinite - just like the airline industry there's a lot of space in the sky for planes, and all the players in the industry could just get more planes - but that's clearly not happening, and more and more people do want to travel. 

 

agreed on owners earnings vs us gaap - i was a bit surprised when i hear that... 

 

Gary

 

 

PS. Look at alaska airlines, delta, etc - they've done really well the last 5 yrs

 

 

 

 

 

[Yours Truly]

i see thanks....

 

might be a bit off topic of my original question, but

 

i just find it easier to deal with my phone company than apple or google.

 

who do you call at apple if something goes wrong?

 

a bill mailed to me at month end is easy to read and i know where the shop is at if i have a problem.  there's also a 1 800 number to call 

 

i just recall i got a apple gift card once and it wasn't activated properly - and nobody could help me...... not even the folks at apple store. 

 

don't know about google....  still, no 1800 number i know of.  i'm not about to hand my finances to an entity with no number to call....

 

You call Apple Care.. They have the best customer service that I know of.. They were nice to replace my iPhone even though it was a month out of it's standard 1-year warranty

[gary17]

i just personally have a different experience, but that's just me may be. 

 

back to the topic -

 

i think John has a really good point here about longing an industry with pricing power - it's something that i've sort of been thinking about this past 6 month, but this interview for some reason really 'clicked' for me - i now have a better sense of it is i am looking for .....

 

and i think it really makes a lot of sense when looking at some of Buffett's bets in the past - he seems to bet on the best company in an industry that has good pricing power.... 

 

what industry will have pricing power over the next decade?  and it's really difficult for the customers to switch? and for rivals to compete?

 

- Banks?

- Insurance Companies (which has more to do with the cycle)

- Consumer products - those made by P&C / J&J

- Coke?

- credit cards?  as prices go up, they charge the same % of service fees, so appears to benefit from higher prices

- productive real estate

- basic materials?

- music / movies <-- itune went from $0.99 -> $1.29 last 3 years; and movies are more expensive now

- food / groceries

 

- TELECOM???

 

 

 

[gary17]

there is an interesting discussion on spectrum on pg 49 of this document from Deloitte

 

http://www.deloitte.com/assets/Dcom-Taiwan/Local%20Assets/Documents/2013%20documents/dttl_TMT_Predictions2013_en.pdf

 

Gary

[Guest valueInv]

thanks txlaw for your insight on this -

 

i have a simplistic view on this as well - perhaps overly simplistic.

 

i think over the next few years we are likely going to just have wireless providers and content providers for the general consumer &  wireline will just be for enterprise....

 

wireless coverage & capacity seems to have a lot to do with installing cell towers & their back haul connections; and there is a cost associated with that.

 

if i already have a certain market share in an industry....  and so are my competitors, would i want to spend a whole bunch of money so i can gain a bit of market share, but at the risk of losing my pricing power? 

 

i agree the absolute capacity is infinite - just like the airline industry there's a lot of space in the sky for planes, and all the players in the industry could just get more planes - but that's clearly not happening, and more and more people do want to travel. 

 

agreed on owners earnings vs us gaap - i was a bit surprised when i hear that... 

 

Gary

 

 

PS. Look at alaska airlines, delta, etc - they've done really well the last 5 yrs

 

The airline industry has lost money over the long term. AFAIK, there are two reasons they are akin money now:

    - Consolidation and capacity cuts resulting in more rational pricing

    - Lower gas prices

 

Telecoms have relied on a similar model of consolidation to maintain pricing power. However, there is still enough competition for price wars to break out. See T-Mobile's effect on pricing in the US. Also, the FCC doesn't seem to be allowing further consolidation 

 

There are a number of dynamics to consider:

            - Softbank entering and funding smaller operators in the US

            - Google and other players trying to bring down pricing with Fiber networks and other effort

            - Technology changes on the horizon that could up end today's relative equilibrium

 

The one thing that maybe a positive for telecoms  is the weakening of net neutrality efforts which may allow them to double charge (both consumers and content providers). However, that is a big threat to players like Google, Netflix, Facebook and others. I think those players will do a lot to weaken carriers' hands.

 

[Guest valueInv]

there is an interesting discussion on spectrum on pg 49 of this document from Deloitte

 

http://www.deloitte.com/assets/Dcom-Taiwan/Local%20Assets/Documents/2013%20documents/dttl_TMT_Predictions2013_en.pdf

 

Gary

 

Take a look at carrier WiFi. It is a classic case of a disruptive technology.

[jay21]

Can you guys point me to any good resources if I wanted to get smarter on telecom, satellite, cable, and wireless technology?  Thanks

[txlaw]

thanks txlaw for your insight on this -

 

i have a simplistic view on this as well - perhaps overly simplistic.

 

i think over the next few years we are likely going to just have wireless providers and content providers for the general consumer &  wireline will just be for enterprise....

 

wireless coverage & capacity seems to have a lot to do with installing cell towers & their back haul connections; and there is a cost associated with that.

 

if i already have a certain market share in an industry....  and so are my competitors, would i want to spend a whole bunch of money so i can gain a bit of market share, but at the risk of losing my pricing power? 

 

i agree the absolute capacity is infinite - just like the airline industry there's a lot of space in the sky for planes, and all the players in the industry could just get more planes - but that's clearly not happening, and more and more people do want to travel. 

 

agreed on owners earnings vs us gaap - i was a bit surprised when i hear that... 

 

Gary

 

 

PS. Look at alaska airlines, delta, etc - they've done really well the last 5 yrs

 

Wireless coverage is really about more than just cellular towers.  When you boil it down to its essence, it's about getting access to the communications networks in the easiest possible way, and that does not necessarily have to be done through the infrastructure and RE that the traditional wireless carriers control (i.e, their spectrum positions and cell tower networks). 

 

If I am a consumer, I don't care about what technology I use to connect to the Internet.  What I care about is ubiquitous connectivity, high throughput, low latency, and mobility.  The reason I go with the traditional wireless providers is because they offer me a last mile connection that I can utilize pretty much anywhere with devices that I can carry around with me.  At this time, VZ and T are the big dogs of this space.  In fact, they're really the only game in town -- as of now.  That's why there is pricing power -- not because of capacity issues.  In this type of situation, when new entrants come in that have a viable alternative to what you're selling, you have the double whammy of losing market share and price competition finally taking hold.  And that hopefully (for the consumer) means reduced ARPUs/ARPAs -- or at the very least, more value for each dollar spent.  Why would new entrants come in?  Because there is finally economic opportunity in this space for these new entrants.  The wait and see approach generally works when technology brings costs down and the market for your proposed services solidify, as John Malone has proved over the years.

 

Someone already mentioned "carrier wifi."  Why are these big wireless providers working on carrier wifi?  Because they know that all consumers care about is having ubiquitous connectivity.  AT&T's goal is to give you a very high speed connection from anywhere and convince you to subscribe to their services on a monthly basis.  But what happens if the MSOs (cable cos) start blanketing cities with their own wifi access points and partnering with wholesale wireless providers (or white space providers) to fill in the gaps?  All of a sudden, you have viable alternatives to AT&T and VZ.  I can turn to TWC, for example, for all my connectivity needs instead of AT&T.  What if big tech decides they will try to subsidize connectivity for customers who use their services by purchasing capacity from the wifi providers, sat cos, wholesale wireless providers, or whomever?  What if content providers who also control communications infrastructure can subsidize their high margin content bundles by providing low cost Internet access?  And if we get a metered world, then you start to see things changing even more.  Consumers will be able to hop on and off people's networks in a much easier fashion.  Again, IMO, it's not really about the spectrum positions and cell tower networks over the long run.  It's about being a low cost provider of connectivity and about customer relationships.

 

The telecom and media industry contains some of the best businessmen in the planet.  IMO, for the vast majority of investors, they're better off putting their money with the John Malones, Brian Roberts, Barry Dillers, and Charlie Ergens of this world, rather than trying to do it themselves.  Even WEB played this space by partnering with Tom Murphy.

[plato1976]

What if we are on the road ? wifi coverage won't reach there, right ? So without using a tower nearby, we just rely on satellite ?

 

 

thanks txlaw for your insight on this -

 

i have a simplistic view on this as well - perhaps overly simplistic.

 

i think over the next few years we are likely going to just have wireless providers and content providers for the general consumer &  wireline will just be for enterprise....

 

wireless coverage & capacity seems to have a lot to do with installing cell towers & their back haul connections; and there is a cost associated with that.

 

if i already have a certain market share in an industry....  and so are my competitors, would i want to spend a whole bunch of money so i can gain a bit of market share, but at the risk of losing my pricing power? 

 

i agree the absolute capacity is infinite - just like the airline industry there's a lot of space in the sky for planes, and all the players in the industry could just get more planes - but that's clearly not happening, and more and more people do want to travel. 

 

agreed on owners earnings vs us gaap - i was a bit surprised when i hear that... 

 

Gary

 

 

PS. Look at alaska airlines, delta, etc - they've done really well the last 5 yrs

 

Wireless coverage is really about more than just cellular towers.  When you boil it down to its essence, it's about getting access to the communications networks in the easiest possible way, and that does not necessarily have to be done through the infrastructure and RE that the traditional wireless carriers control (i.e, their spectrum positions and cell tower networks). 

 

If I am a consumer, I don't care about what technology I use to connect to the Internet.  What I care about is ubiquitous connectivity, high throughput, low latency, and mobility.  The reason I go with the traditional wireless providers is because they offer me a last mile connection that I can utilize pretty much anywhere with devices that I can carry around with me.  At this time, VZ and T are the big dogs of this space.  In fact, they're really the only game in town -- as of now.  That's why there is pricing power -- not because of capacity issues.  In this type of situation, when new entrants come in that have a viable alternative to what you're selling, you have the double whammy of losing market share and price competition finally taking hold.  And that hopefully (for the consumer) means reduced ARPUs/ARPAs -- or at the very least, more value for each dollar spent.  Why would new entrants come in?  Because there is finally economic opportunity in this space for these new entrants.  The wait and see approach generally works when technology brings costs down and the market for your proposed services solidify, as John Malone has proved over the years.

 

Someone already mentioned "carrier wifi."  Why are these big wireless providers working on carrier wifi?  Because they know that all consumers care about is having ubiquitous connectivity.  AT&T's goal is to give you a very high speed connection from anywhere and convince you to subscribe to their services on a monthly basis.  But what happens if the MSOs (cable cos) start blanketing cities with their own wifi access points and partnering with wholesale wireless providers (or white space providers) to fill in the gaps?  All of a sudden, you have viable alternatives to AT&T and VZ.  I can turn to TWC, for example, for all my connectivity needs instead of AT&T.  What if big tech decides they will try to subsidize connectivity for customers who use their services by purchasing capacity from the wifi providers, sat cos, wholesale wireless providers, or whomever?  What if content providers who also control communications infrastructure can subsidize their high margin content bundles by providing low cost Internet access?  And if we get a metered world, then you start to see things changing even more.  Consumers will be able to hop on and off people's networks in a much easier fashion.  Again, IMO, it's not really about the spectrum positions and cell tower networks over the long run.  It's about being a low cost provider of connectivity and about customer relationships.

 

The telecom and media industry contains some of the best businessmen in the planet.  IMO, for the vast majority of investors, they're better off putting their money with the John Malones, Brian Roberts, Barry Dillers, and Charlie Ergens of this world, rather than trying to do it themselves.  Even WEB played this space by partnering with Tom Murphy.

[matjone]

Can you guys point me to any good resources if I wanted to get smarter on telecom, satellite, cable, and wireless technology?  Thanks

 

jay21, someone posted some industry primers on these a while back.  you should be able to find them.  if not let me know and I'll send them to you

[APG12]

Can you guys point me to any good resources if I wanted to get smarter on telecom, satellite, cable, and wireless technology?  Thanks

 

jay21, someone posted some industry primers on these a while back.  you should be able to find them.  if not let me know and I'll send them to you

 

If I remember correctly, the telecom primers in that collection were pretty old. This book was informative: http://www.amazon.com/Essential-Guide-Telecommunications-Guides-Prentice-ebook/dp/B008HHE3C4/ref=sr_1_1?s=books&ie=UTF8&qid=1392057335&sr=1-1&keywords=telecommunications

[txlaw]

What if we are on the road ? wifi coverage won't reach there, right ? So without using a tower nearby, we just rely on satellite ?

 

Well, if there is no tower nearby, or some other access point that is connected to the fiber networks, then the only way to get wireless would be via satellite.  But there will absolutely be more towers built.  Already, many of the highways in the US are mostly connected to the Internet because towers have been (or are being) built along them. 

 

But the fact that most "on the road" connectivity will indeed come from towers connected to the Internet doesn't mean that the incumbent wireless providers win from that.  First off, the assumption that there won't be wifi (or some other non-cellular) connectivity from those towers doesn't necessarily hold true.  A tower connected to the Internet is just that.  It's not the last mile connection.  Spectrum is the RE over which the signal must travel, and while the incumbent winners have the best spectrum and network of access points at the moment, one can already see strengthened competitors and new competitors emerging.

 

I'll just give you a hypothetical scenario.  Charlie Ergen controls DISH, which has a bunch of spectrum that can be used for cellular and ancillary terrestrial component (ATC) connectivity.  Let's say he successfully buys T-Mo.  He can then contract with tower companies and backhaul providers to provide a viable nationwide network of last mile wireless connections.  And then what if he decides to partner with a MSO o fill in the gaps of connectivity via coax and wifi, and to send his content bundle over their pipes.   

 

All sorts of interesting partnerships could form in the future.  I can guarantee you that John Malone is cooking up something good in this regard.  Google is probably thinking about doing something interesting here as well. 

 

All of a sudden, VZ and T-Rex aren't the only game in town. 

[gary17]

thx for all the insight - very useful & indeed tech is difficult to predict...  on the other hand, i still think price is the best thing to controlling the risk in an investment - rather than being able to guess what future events will transpire.  so i think what John Hempton says has some truth to it; if not, why are we seeing competition - clearly, the pie is too good to be true to be enjoyed by a few - and the telecom / cable cos will do their part to sustain their competitive positions...    so the only game there is for me is to find the ones that's very, very cheap.....  so i'd be looking at the beat down ones in europe like Ti-A and Orange instead of verizon , etc.      Gary

[txlaw]

thx for all the insight - very useful & indeed tech is difficult to predict...  on the other hand, i still think price is the best thing to controlling the risk in an investment - rather than being able to guess what future events will transpire.  so i think what John Hempton says has some truth to it; if not, why are we seeing competition - clearly, the pie is too good to be true to be enjoyed by a few - and the telecom / cable cos will do their part to sustain their competitive positions...    so the only game there is for me is to find the ones that's very, very cheap.....  so i'd be looking at the beat down ones in europe like Ti-A and Orange instead of verizon , etc.      Gary

 

I agree that price is a huge factor.  If VZ dropped 50% tomorrow, I'd make it my entire portfolio.  I myself have some telecom investments.

 

But what John Hempton says is not insightful in this regard.  He hasn't thought it through.

[gary17]

what telco's have you been looking at?  if you don't mind sharing i'd like to take a look at them!!  thanks!!    ;D

[txlaw]

what telco's have you been looking at?  if you don't mind sharing i'd like to take a look at them!!  thanks!!    ;D

 

I'd rather not say, unfortunately.

[ni-co]

I believe that Hempton is correct in terms of making a bet on high broadband utilization.  However, it seems to me that the more sensible vehicle to effect such a bet is in cable rather than telecom.  Hempton would be well serviced by listening to Malone, in my opinion.  When I look at telcos, I see enormous capex that doesn't stop.  Looking at cable, it seems like high bandwidth is available with minimal capex.

 

Listening to this interview, that's exactly what I was thinking, too.

 

Can you guys point me to any good resources if I wanted to get smarter on telecom, satellite, cable, and wireless technology?  Thanks

 

1. Read/watch everything John Malone has said for the last 3-4 years.

2. Think about the telcos again under his perspective.

3. Think about your own data usage on mobile devices: How much of it is really over the mobile network - and why is it so?

[racemize]

Latest video from Perlman:

 

http://techland.time.com/2014/02/19/artemis-pcell/

 

 

My main questions:

1) How many of his transmitters does he need to do this on a massive scale (i.e., how expensive a roll out are we talking)?

2) How well does it deal with fast moving and/or high fading terminals?

 

To me, his descriptions of DIDO (e.g., in the white paper) sound quite a bit like MU-MIMO, but with a high degree of separation on the network side.  I'm not sure if he's provided enough details to really discuss what the difference would be, but if any other wireless experts are around that think they know, I'd like to hear it.  (I write patents on wireless technology, including MU-MIMO, but that gives me a bit of a higher level understanding than an actual wireless engineer)

[gary17]

 

Oddballstocks, we're you in the telco industry? I'd be interested to hear your thoughts on what would be good exposures for the future where there will be more connectivity.... I wonder which player in this industry can keep raising prices.. equipment supplier, content providers, or the Internet service providers...

 

Btw here's a recent cbc article indicating Canadian carriers have been hiking prices.

 

http://www.cbc.ca/news/business/wireless-carriers-hike-prices-across-canada-1.2575886

 

It is interesting John has this thesis that the telcos will get good pricing power moving forward - I am wondering if anyone else on this board has thought about this? 

 

His argument is that due to the engineering limitations, it won't be possible to have an infinite number of cell towers to supply the demand for boradband wireless data in the next decade.... and as a result...  telcos will have the ability to raise their prices.

 

i quickly checked my cell phone bills  - seems like there is some truth to that.  i am wondering if others agree with this observation.  Are there any experts in telcos here (Packer? and others... ? )  that could weight in on this?  Thanks    Gary

 

I have a ton of thoughts on this, I've emailed some of this stuff to others on the board privately in the past.  Some of this might be just a brain-dump, bear with me and feel free to ask followup questions.

 

Yes, an antenna has a certain amount of bandwidth available for connections on a tower.  If enough devices need access it's possible a tower might not have enough space for antennas.  Towers sell space by slot, not bandwidth or use.  If you wanted to put a ham radio antenna on a tower you'd be paying the same as what AT&T might be paying.  The key constraint on a tower is backhaul.  A tower's capacity is limited by the bandwidth available at the site.  This means a tower in NYC is going to have a much higher capacity than a tower in Ruff Creek PA.

 

Backhaul is the name of the game, the higher the backhaul pipe the more capacity towers have.  The issue is no one likes towers, they're ugly and have a lot of physical limitations.  The idea cell environment is a flat geography with a lot of low buildings.  Hilly areas have a lot of dead spots and require many more towers to get the same coverage.  Building a tower can be expensive, many of the big tower companies have towers with infinite payback periods.  There are also tower that are paid back in a few years.  The most profitable towers are a fascinating study in itself.  I no longer have access to ARPU per tower numbers, but I remember digging into this stuff years ago.  Where I live there was an obscenely profitable tower that was located in a suburban park.  A number of local roads converged near this tower, and it was very well utilized.  Since it was in a park the city leased the land for next to nothing.  A small aside, land owners who lease land are often receiving much less than they should.  There is a whole poaching industry around this.

 

Anyways due to the limitations of the tower infrastructure the industry has been moving towards small cells.  Instead of an antenna on a tower small cells are mesh networks of small antennas spread over a large area.  This reduces coverage issues and dead spots.  Think of a tower, you only have so many angles to hang an antenna, and antennas for the most part are directional.  More antennas means more coverage.  More and smaller antennas also reduces the backhaul needs.  If a tower has say 30 antennas you need a backhaul to support those 30.  If the antennas are spread out the backhaul for each antenna is much smaller.

 

Spreading out users among antennas with bigger backhaul is what's enabling higher speeds.

 

So going forward if you have an antenna with a fiber connection you in theory have a pipe that can handle 14 Tbps.  The limiting factor on that is the routing equipment where the fiber terminates.  I have Verizon FIOS at home, there is a fiber line to our home.  I had seen a few years back that they could support up to 600Mbps with the current lines and current routing equipment.  As the termination equipment improves the max speed could theoretically improve as well.

 

I think here's the next step with this evolution.  Companies start to distribute MiFi type devices to homes.  The users own home network would provide the backhaul, and it would be the ultimate mesh network. 

 

Everyone in this space seems to gravitate towards the tower and bandwidth providers.  The problem is they are being required to provide more product (bandwidth) at the same or lower prices.  Ten years ago 768kbps DSL was acceptable, now for the same price 10x the bandwidth is available.

 

A few other random tidbits that I learned while in the industry.  Companies have created artificial pricing power over data, it really doesn't cost any more to transfer a lot verses a little data.  On the whole it's something like 5% of a network's users who use the majority of the data.  Rate limiting them could provide unlimited data to everyone else. 

 

The second thing is text messages are the gravy train for cell providers.  A text message is encoded in the packets your phone sends to the tower to check signal strength.  That's why the length is limited on them.  This is "free" in the sense that your phone is always checking in with towers.  Adding a text message to piggyback on that is just using the full packet instead of leaving a portion of it empty.  The fact that carriers found a way to charge, and charge a lot for this is amazing.