pricing – Page 3 – Pertinent Observations

Queueing up for boarding

I’m writing this from Barcelona airport, waiting for my flight to Doha, as I return to Bangalore today. A pre boarding announcement was made some minutes back but boarding is yet to commence, and this is what the airport looks like now.

As you can see it’s a fairly long line. And boarding hasn’t even begun. I used to believe that this phenomenon of queueing up for boarding is a uniquely Indian phenomenon, but over two trips to Europe over the last months I’ve disabused myself of this notion.

In the last six months I’ve taken seven flights within Europe and for each of them there has been a long boarding queue, mostly before boarding has begun. In a couple of cases I’ve participated, and for good reason. On one occasion I chose not to participate and regretted it. But there have been occasions when I’ve chosen not to participate and haven’t regretted. I have no plans to participate in the queueing today. For an international flight it’s not rational. Let me explain.

Within Europe most low cost carriers charge for any checked in baggage. As a consequence, people carry on large pieces of luggage. As a consequence of this, there is severe shortage of luggage rack space within the flight and so if you don’t board early there’s a good chance that your baggage will have be carried in the hold, resulting in unnecessary delays after landing.

Thus, pricing of low cost carriers where they anally charge for luggage results in suboptimal boarding process, and significant discomfort.

In any case, Europeans are thus used to queueing up for boarding, for that can guarantee them a relatively smooth flight experience. And my theory is that this carries on to international too.

But why is this irrational for international flights? Because most international flights (Qatar for sure) have reasonably generous check in baggage limits, because of which people don’t carry on massive pieces of luggage. The per capita availability of rack space, from my unscientific observations, also seems higher in wide body flights. Hence it matters less whether you board first or last.

Finally the queue didn’t matter today since Qatar decided to use the rather idiotic zone wise boarding system on the flight today. I’ve boarded. And had to place my bag one seat away. Not that I mind.

See you from the dark side

Uber’s new pricing structure

So Uber has changed its pricing structure in Bangalore. Earlier they nominally charged Rs. 50 fixed, Rs. 15 per kilometer and Rs. 1 per minute, and then slapped a 35% discount on the whole amount. From today onwards the new fare structure is Rs. 30 fixed, Rs. 8 per kilometer and Rs. 1 per minute, without any further discounts. They’re marketing it using the Rs. 8 per kilometre number.

I took a ride this afternoon under the new fare structure, and the bill was Rs. 152, about the same as it would have been under the old fare structure. In that sense, I guess this was an “average ride”, in terms of the distance by time covered. This was the kind of ride where their assumption on distance travelled per unit time (in coming up with their new formula) was exactly obeyed!

So how do we compare the old and new formulae? We can start by applying the discount on the nominal numbers of the old formula. That gives us a fixed cost of Rs. 32.5, a per kilometer cost of Rs. 9.75 and a per minute cost per 65 paise. We can neglect the difference in fixed cost. Comparing this to the new cost structure, we find that the passenger now gets charged a lesser amount per kilometre, but a higher amount per minute.

In face, taking the “slope” between the old and new rates, the per kilometre cost has come down by Rs. 1.75 while the per minute cost has risen by 35 paise. Taking slope, this implies that Uber has assumed a pace of a kilometre per five minutes, or twelve kilometre per hour.

So if your journey is going to go slower than twelve kilometres per hour, on average, you will end up paying more than you used to earlier. If your journey is faster than twelve kilometres per hour, then you pay less than you did under the previous regime.

A few implications of the new fare structure are:

1. Peak hour journeys are going to cost more, for they are definitely going to go slower than twelve kilometres an hour
2. Your trips back from the pub should now be cheaper, for late nights when the roads are empty you’ll travel significantly faster than twelve kilometres an hour
3. What does this imply for the surge pricing in the above two cases? I think the odds of a surge during peak office hours will come down (since the “base price” of such a trip goes up, which will push down demand), and the odds of a surge late on a Friday or Saturday night might go up (since base fare has been pushed down for that).
4. The Rs. 30 fixed cost implies that if a driver travels at 12 km/hr when looking for a new ride, the gap between rides for a driver is 11.5 minutes (if the driver spends X minutes, he will travel X * 12/ 60 kilometres in that time. The compensation for this combination is X + X*12/60 * 8, which we can equate to 30. This gives us X = 11.54).
5. Trips to/from the airport will now be cheaper, for you can travel much faster than 12 km/hr on that route. So Uber will become even more competitive for airport runs. Again this might increase probability of a surge at peak flight times.

I continue to maintain that Uber has the most rational price structure among all on-demand taxi companies, since the fare structure fairly accurately mirrors drivers’ opportunity costs. Ola doesn’t charge for the easily measurable time, and instead charges for “waiting time”, which is not well defined. Ola also has a very high minimum fare (Rs. 150). I wonder how they’ll play it if their planned acquisition of TaxiForSure goes through, since TaxiForSure was playing on the short trip model (with minimum fares going as low as Rs. 49). Given the driver approval before a ride, though, I doubt if anyone actually manages to get a Rs. 49 ride from TaxiForSure.

Times continue to be interesting in the on-demand taxi market. We need to see how Ola responds to this pricing challenge by Uber!

Cancellation charges in the airline industry

So seat 2B in flight number I5 1322, Air Asia flight from Bangalore to Goa this morning, went unfilled. I wasn’t on this flight, but perhaps for that precise reason I can assure you that the above statement is true. For that seat belonged to me, as I had booked my tickets to go to the Goa Project.

So I initially decided to go to the Goa Project, and booked my tickets for it (on AirAsia). And then work and other things meant that I decided against going, but when I went to the AirAsia website to cancel my ticket, I realised that I wasn’t able to do it! Essentially AirAsia has no concept of cancelling a flight!

This is option pricing taken to one extreme, where the entire price is taken in the form of an option premium! The airline industry was at the other extreme not so long ago – where options weren’t priced at all. In other words, until a decade or a bit more back, you could change or cancel your bookings at little extra cost, though this optionality (and other things such as regulation) meant that the ticket was quite expensive!

Now it seems like some of the “extreme low cost carrier” (such as AirAsia or RyanAir) have moved to the other extreme – where there is no concept of cancellation. And I’m not sure of the wisdom of this strategy. For I believe that this strategy does not maximise either the social utility or the airline’s profits.

The social utility bit is easy to see – I ended up paying full price for a ticket that I didn’t travel on, so I’m hurt. The marginal passenger who wanted to travel on today’s flight to Goa but didn’t find a ticket was hurt (this person could’ve flown had I cancelled my ticket). And the airline missed an opportunity to resell my ticket to someone else (potentially at a much higher price) and make money on it! So it’s a lose-lose situation all round.

The commercial aspect follows from the above – in case demand for this flight was low, then it perhaps made sense to not refund any of my money, for now the airline would not be able to sell the ticket to another passenger. However, if demand were higher (a very probable event), the airline missed an opportunity to make much higher revenue on this seat than what they did by making me not cancel it. I wave my hand here a bit, but it is easy to see that the airline is letting go of potential profits by not letting me cancel my ticket!

I’m not saying that the airline refund my full amount, or anything close to that – that doesn’t make sense for them since they’ve sold me an option. All I’m saying is that the price of zero (between total cost and option cost) doesn’t make sense. Even if the airline were to refund a thousand rupees (I paid around 6000 for the two-way fare) if I cancelled it, and the cancellation procedure were smooth, I would have cancelled it. And the expected revenues on this one seat would definitely exceed this kind of refund, you would expect?

Possibly it’s time for airlines to indulge in dynamic pricing for cancellations also. If the flight is near full, the airline can resell my cancelled ticket for a fairly high amount, so they can induce me to cancel by offering me a decent refund. If at the time I want to cancel, however, demand is low, then they need not offer me much. These things are not at all hard to price!

So by going extreme on the cancellation charges Air Asia and its ilk are leaving money on the table! If only someone were to tell them to pick it up!

Coffee pricing at Bangalore airport

I had what I thought was a neat theory on coffee pricing at the Bangalore International Airport. However, on second thoughts, I think the theory is bunk. On third thoughts, however, I think I should publish it, even though I don’t believe it is true. So here goes.

There are two places where you get great filter coffee outside the terminal of the Kempegowda International Airport near Bangalore. At the Western edge, close to the departure gates, there is Maiya’s, which also sells South Indian snacks and food items apart from pre-mixed filter coffee (without sugar). The coffee here is priced at Rs. 30 per cup. At the Eastern edge, close to the arrival gates, there is an outlet of Hatti Kaapi. Now, this outlet has started selling snacks, too, and now sells coffee in cups and pots of various sizes. However, the “basic” filter coffee, which is mixed fresh on the spot (you can choose the level of sweetness, and strength) and is available in a paper cup the same size of that at Maiya’s, is priced at Rs. 15.

The argument I had in mind for this differential pricing was that the clientele of Maiya’s, it being at the departure gate, is mostly passengers on their way to board flights. Given that they can afford to fly, they can afford to pay a premium for good coffee. Hence it is good economics to charge a high price for the coffee. Also, given that departing passengers are usually short on time, it is unlikely that they will pay the additional time cost of walking down to the Hatti Kaapi outlet in order to save the Rs. 15 per cup monetary cost of coffee there.

At the other end, Hatti Kaapi is at the arrival gate, and its major clientele consists of drivers. Given the distance of the airport from Bangalore city, it has become almost unheard of for relatives and friends to go all the way to the airport to pick up people. So people waiting at the arrival gate are mostly drivers. And given that drivers are not particularly rich (not rich on an average as airline travellers at least), they are much more price-sensitive when it comes to their coffee. And so the coffee at this end of the airport is priced at a much more reasonable Rs. 15 per cup. This makes for a nice economic theory, right?

The theory falls apart, however, if you compare the prices at Maiya and Hatti kaapi outlets at the airport to their prices elsewhere in the city. A good parallel is in Jayanagar, where the same two establishments have outlets across the road from each other (intersection of 7th Main and 30th Cross).

The kind of service in the two establishments is similar. You stand in line, take a token and stand in line again to get your cup of coffee. Hatti serves its coffee in a paper cup while Maiya serves in a ceramic cup-and-saucer. Like at the airport, Hatti’s kaapi is mixed on the spot and you can set your sugar level. Unlike at the airport, Maiya also mixes coffee fresh on the spot, but like at the airport no sugar is added and you need to add it yourself. It must be mentioned here that the Maiya in question has been there for several years while the Hatti outlet across the road started only a few months back.

And how do Maiya and Hatti price their coffee in Jayanagar? Maiya is at Rs. 18 per cup, and Hatti at Rs. 10 per cup. So the ratio of prices of a cup of coffee between Maiya and Hatti at the airport (2:1) is not very different from the ratio of prices of a cup of coffee between Maiya and Hatti in the city (1.8:1). So the theory I mentioned above falls flat on its head.

Where the theory stands, perhaps, is in explaining why Maiya and Hatti are located at the airport at the ends where they are located – Maiya being a more premium brand in general captures the passenger crowd at the departure gate, while Hatti being a more price-sensitive brand captures the driver crowd at the arrival gate.

And regarding the coffee itself I’ve had coffee at all four outlets and can confirm that both in the city and the airport, the quality of Maiya’s coffee is much superior to Hatti’s. In fact in Jayanagar, where the two outlets are a 5-minute walk from where I live, I prefer to pay the price and time (the lines at Maiya are generally longer than at Hatti) premium to drink coffee at Maiya rather than to drink the more “reasonably priced” stuff at Hatti.

Pricing markets in cabs and beer

Earlier this evening Udhay and I shared a cab back after beer and biryani. We don’t stay particularly close by (using the place we met as point of reference), but I think it was pareto optimal for us to share the cab rather than take two cabs. I got off first at my place and Udhay went on to his place. We used Uber’s fare splitting feature for the trip.

I just got the bill and saw that I’ve been charged exactly half of the total bill. Given the distance from our meeting point to my place and Udhay’s place it perhaps was pareto optimal but had we met any closer it may not have been a fair split – if the place we met was closer to my place than my place is to Udhay’s, then splitting the fare equally would have been unfair to me – for I would have paid more for sharing the ride than I would have had I taken a cab by myself! Can Uber do better?

Once we have enabled the ride sharing and splitting thing, Uber knows who all are travelling, and Uber knows where each of us gets off (if our phones are on, that is). Based on where we break off from the cab, can Uber estimate where each of us got off and split the fare accordingly? Given how good their app has been so far, I would expect them to tweak their ride splitting algorithm and introduce this measure soon.

Going a little back in the day, Udhay and I were at Punjabi By Nature in SuddgunTepALya. We were there during the restaurant’s “happy hours” where they have a buy-one-get-one-free offer on beer. However, it was after we had ordered a “tray” of samplers that we were told that the Bogof didn’t apply to the tray. We also ordered another glass of beer, which duly arrived with a “partner”.

There are two things about Punjabi By Nature’s pricing that I found interesting. The first bit was the non-applicability of “happy hours” to the tray. Is it a measure by them to reward their regular customers who know what to drink at the cost of first-timers who invariably ask for the sampler set? Any other explanation for happy hours not applying to the tray?

The second interesting bit is about the pricing of the drinks itself. A 500ml glass of beer was priced at Rs. 240 plus taxes, which is par for the course for a microbrewery in Bangalore. In most other microbreweries, the sampler trays are priced “reasonably”, approximately at the same per-ml price as the glasses of beer. Here, though, the tray (on which we didn’t get Bogof, remember) was prices at Rs. 625 per taxes! Of course, there were six beers that were sampled in the tray and the quantity was also significantly more than at other sampler trays (here it was at least 150ml per glass if I’m not wrong; in other microbreweries in Bangalore it’s more like 100ml), yet the premium in pricing for the samplers was significant!

I wonder what makes other microbreweries price their samplers at about the same per-ml cost as their glasses – given that the standard practice is to incentivise customers to buy in larger units. I also wonder what makes Punjabi By Nature impose a “penal” price (assuming it was 150ml per sample, it works out to about 70 paisa per ml. The glass of beer (not accounting for happy hours) costs 240/500 = 48 paisa per ml, so the sampler is 50% more expensive) on its samplers. For now that I know how it’s priced, the next time I go to Punjabi By Nature I’m going to order glasses of beer (hopefully in happy hours) and not the sampler!

Pricing is a funny game, I tell you!

Carrots have become expensive

Carrots have become expensive in Bangalore, relative to cucumbers at least.

I’m at mainland China in Jayanagar to have their excellent pepper lemon chicken soup – which is brilliant when you’re nursing a cold – like I am now.

Like any good Chinese restaurant they’ve given kimchi as complimentary starter and I’ve been eating that as I wait for me soup.

As you can see in the far right corner of the photo though the kimchi (not sure if the pickled carrot and cucumber they give as complimentary starter can be classified this or if the term is reserved for the pickled cabbage – anyhow) only has cucumber.

It’s my mistake that I took this photo now and not even it just arrived but what was supposed to be a bowl of carrot and cucumber was actually a bowl on picked cucumber only with one token piece of pickled carrot!

Clear indicator that carrots are expensive now – relative to cucumbers at least!!

PS: I shopped for vegetables on Wednesday. Bought carrots for sixty rupees a kilo while cucumbers cost twenty a kilo. So no ticket science to this post. Just a pertinent observation

Comparing Airline Pricing across countries

The WSJ reports, based on a survey, that airline prices are cheapest in India (HT: Nitin Pai). They evaluate the cost of flying in terms of cost per 100 km. The usual ridiculous comparisons that go with any such article are present in full here – they compare the per kilometer cost of flying to train and bus fares, and conclude that flying is cheapest (this reminds me of an equally ridiculous report in the Times of India which showed that the cost of India’s Mars mission was less than that of taking a bus in Mumbai).

A few thoughts on this report by the WSJ:

Per km is a wrong way at looking at air fares. In most markets (from my experience pricing air tickets and cargo), fares are set based on competition and to fill capacity. Notice that marginal cost of a passenger is really really low, so once a flight is in place airlines will do what they can to maximize their revenues from that.
Taking this forward air fares depend on the competition in a particular sector (btw, the way airlines price it, Bangalore-Barcelona is one sector, and the price of that doesn’t depend on the Bangalore-Frankfurt and Frankfurt-Barcelona prices. These are three independent markets and triangle inequality doesn’t necessarily hold. Just FYI). So going by the report, India has a lot more competition compared to other countries in most sectors.
Now think of other large countries (you need big area for flights to make sense) and think of their income levels compared to India. Only developed countries and other BRICS come to mind. All of them have a higher willingness to pay than India.
Airline prices are thus a function of simple (elastic) demand and (inelastic – flight schedules are announced by “season”) supply. So once in a season we have a lot of flights scheduled, competitive forces push prices down
Given that it’s demand and supply that determines airline prices and not costs, in my opinion the airline industry goes through cycles. You have lots of competing airlines. Prices are low and they lose money. In the course of time one or two go out of business or scale down, and that leads to increased prices. Airlines make money for a while, and then looking at the supernormal profits you have new entrants and so on. India right now is going through the phase where you aer getting more investors (Air Asia, Air Costa, Tata-SIA, etc.). That depresses prices. In a year or so I would think someone like SpiceJet will go out of business and that might push fares up for a while.
There’s also the seasonality factor – based on regular travel to Bombay over the last two years I’ve found that fares in the monsoon months are half of the fares at any other point in the year. It’s a function of demand, again (Indian seasons don’t exactly tally with international seasons according to which schedules are made, so this results in flawed matching)! Given the timing of the piece it is possible that Indian fares in the monsoon months have been sampled.

Charging for parking can solve a lot of problems

Bangalore city has this bizarre policy in that the city doesn’t charge for public parking (barring one or two roads). The ostensible reason was to cut the wings of the so-called “parking mafia”, which had taken over the concessions for operating parking lots through the city. However, not charging for parking means giving away parking for a non-monetary fee (first come first served, for example, or the cost incurred in driving around looking for a place to park). And there are a number of other problems that charging for parking can be solved that the current no parking fee dispensation doesn’t take care of.

The lack of parking charges anywhere in the city, including the central business district, means that it is impossible to profitably take your car (without a driver) to such areas. There are non-monetary costs that people pay for parking – cost of time, cost of fuel driving around, cost of paying touts to hold down a parking spot, etc. Now if only these costs can be monetized then it would be a valuable source of revenue to the impoverished city council
Every weekday afternoon the middle of the city gets gridlocked thanks to the presence of four high-profile schools (Bishop Cotton Boys’, Bishop Cotton Girls’, Sacred Hearts and St. Joseph’s Boys) on the same stretch of road. The reason for gridlock is that people double and triple park on the four lane road (albeit with a driver in the car so it’s not strictly “parking”), and this leads to massive jams. Thanks to these schools it is impossible to move from the southern part of the city to the central business district in the afternoons. Now, if we could have dynamically priced parking on these roads, the cost of parking there for picking up kids might be deterrence enough for people to make alternate arrangements (such as school buses) for picking up the kids, and thus decongest the zone. The city has taken several other initiatives (titled “safe route to school”) but the gridlock continues.
Thanks to free street parking there is no incentive for people to provide for parking spaces. I live in what is classified by the city as a “mixed zone”. So there are a number of commercial establishments close to where I live. Few of them actually provide parking, leading to major parking chaos around where I live (especially if there is a function at any of the three convention centres located within 100m of my house). The presence of paid street parking can lead to more regulated parking (currently lack of regulation means parking is rather haphazard and blocks gates). It will also create an incentive for the commercial establishments to provision for their own parking spots
Establishments (mostly eateries, but some shops too) in the city have responded to the parking problem by providing valets – who will save you the time you would take to find a place to park. This is a rather inefficient solution. What if I have to visit four shops on the same street in an area where parking is difficult, for example?
Some buildings in the CBD which have excess parking space let you use their parking space for a fee that is not unreasonable. What we need is more such buildings opening up their parking spaces to public (the “park here only if you have business in my building” paradigm is nonsense). And for that they need to be assured of a reasonable fee. With the city undercutting them at a price of zero they have no real incentive to open up.
In the short run, until supply of parking the CBD increases, parking charges can be a good substitute for congestion charge to put a price on people driving into the city. While this will ease out once the supply of parking responds to the demand, in the short run it might work. Though it could be argued that the non-monetary costs of parking are already achieving this objective!

There are many more such reasons I’m sure you can think of. Yet, for close to ten years now the city of Bangalore has steadfastly refused to charge for parking spaces, which is extremely inefficient. Maybe we need MonkeyParking to enter Bangalore. That’s perhaps the only way the municipal authorities will recognize their folly and start monetizing their parking fees.

Using illegal markets as price discovery mechanism

One of the pet projects of my former MLA (former because I moved residence, not because he was voted out) is to set up a formal mechanism for regulating street vendors. He wants to introduce some kind of a medallion for street vendors so that they have legal sanction, and at the same time subject them to health and food safety checks. Considering this is a fairly common practice abroad, and even in some parts of India (like Goa), it is high time something like this is introduced.

Food cart in Miramar, Goa. Notice the bottom portion – it has a license number

The question, however, is how we will price these “medallions”. Price them too high and existing vendors will not want to get into the new regime, and will remain outside regulatory bounds. Price them too low and it can result in missed opportunities and rent seeking (the current situation, where the price is zero, can be seen as a degenerate case of too low a price).

One way to do this would be through an auction. However, one thing we need to preserve is continuity – current existing street vendors need to get a chance to enter the legal fold without too much disturbance from their current business. An auction might see them being priced out and then continue to operate in the illegal framework – which is not an optimal solution.

The solution lies in status quo, and in illegal markets. Given that street vendors currently operate without a license, they are essentially illegal. The way they manage to keep their carts and not get arrested is by paying off a set of public (and private) officials. Perhaps there is the cop who seeks his weekly rent (hafta). Perhaps a municipal officer seeks the same. Maybe a local thug, too.

If you think about this, the sum total of all these payments is essentially the “license fee” that the vendor pays in order to do his business currently. Can we take this as a proxy for the appropriate license fee in a particular location? Can we do an anonymised survey among street vendors (after having classified them into different “areas”) in order to determine the clearing price?

The basic idea is that illegal markets (like that of the “hafta” for being a street vendor) are markets, too, and their price discovery mechanism is as legitimate as those of more legitimate markets. Thus, the price discovered by these illegal markets are a great starting point for regulated pricing!

There is one thing to examine, though – if we price the license at the same “fee” that the vendors are currently paying different rent seekers, will the rent seekers still be able to seek rent? My hypothesis is “no”. The reason rent seekers seek rent is because in its absence there is a “surplus” that the vendors generate which they are willing to share with the rent seekers. If all the rents that are now being collected by illegal rent seekers are subsequently sought by the state, there is no room left for the illegal rent seekers to operate in!

The question is if this framework can be used for eliminating other forms of rent-seeking, too. The answer, sadly, is no. A large number of the rents that are currently being sought are for “public services” which are not supposed to have a fee. I had to get a document from a court recently, and had to pay rents at different points in the chain in order to get it on time. Using this framework, the way to eliminate this would be by increasing the official court fee, but what one must keep in mind is that court services are inelastic – the increase in fee by a few thousand rupees will not deter me from asking for an order. Thus, even if the court fees are increased, nothing prevents the current rent-seekers from continuing to operate.

In other more elastic markets, however, this approach will work, and better be tried.

Chatting and messengers

So the wife has just moved abroad and I haven’t even bothered getting international calling enabled on my mobile phone. It’s not that I’m not concerned about keeping in touch with her – it’s more to do with the plethora of options to keep in touch with her than a normal phone call.

Firstly there’s whatsapp, which I’ve used for the last two years (the trigger to join whatsapp was the limit in the number of text messages one could send per day which was introduced in 2012 as a “rumour prevention mechanism”). A large number of people on my contacts list use WhatsApp, which means that it is extremely rare that i use normal text messaging to connect to them.

And earlier today, while she was waiting for a connection at Frankfurt airport, the wife asked me to install Viber, saying it allows us to talk without any international dialing cost. I just had a brief conversation with her and the quality was extraordinary (especially given i’m on a weak BSNL broadband here and she was in a car there). Then I looked at my contacts who are on viber, and the number of my contacts who are using Viber is insanely high! Almost makes me seem foolish for not joining in so far.

And then earlier today I spoke to someone in Singapore using Skype. Call quality wasn’t that great – we dropped a couple of times – but it was still pretty good. And then there is google hangouts. And then there is apple’s facetime (perhaps the main reason the iPad fell my side when we were dividing our assets prior to the wife’s move is that I could have an Apple device with me so that we can FaceTime!).

The number of options for messaging is so large that I wonder how long the whole calling and messaging model will continue. I had shown in a recent blog post (on my public policy blog) that the number of SMSs sent per user in India peaked three years ago and has then been on a secular decline. And now there is news that the telecoms regulator in India is thinking of instituting a fee on providers such as WhatsApp and Viber because of the revenue losses they are causing to the mobile phone service providers in India (like Airtel, Vodafone, etc.).

The question therefore is what the future of telecom will look like given the large number of internet based reliable communication providers who are springing up. My prediction is that the phone call is not going to die – what sets apart a phone call from a Voice over IP connection (such as Skype or Viber) is that it is “online” (i forget the technical term for it – ok got it it’s “network switching” as opposed to “packet switching” which is how the internet works).

To explain that in English, when I talk to you over the phone (normal phone call) there is a dedicated line that goes out from me to you. Basically your telecom provider and mine and the network interchange come together so that a virtual line is drawn from me to you, and this is exclusive for us as we talk (call dropping on mobile phones happens when we try to move from one “cell” to another and get lost in between).

The internet doesn’t work that way. When I send you a “voice message” over the internet, it goes one hop at a time. There is no dedicated line from me to you. The reason we are now able to voice chat online reliably is that the bandwidth available is so much that packets usually get connected quickly enough (think of a bus network so dense that you can change buses instantly to get to your destination – it virtually simulates a “direct bus”). When the network is busy or the bandwidth clogged, however, there might be some delays (while a phone call once connected remains connected).

Given this distinction the phone call offers a level of reliability that packet switching based voice messengers can never reach. And there will always be a market for extremely high reliability. Hence the phone call is not going anywhere.

The SMS, on the other hand, is again packet switched, and a mechanism in which carriers could extract large amounts of money. The SMS will soon die a natural death – kept alive only by means of government mandated services such as two factor authentication of credit card transactions.

While the fees on carriers such as Viber might become a reality in a place like India they are unlikely to sustain as international norms become uniform. What we are likely to see instead is mobile carriers coming to terms with existence of such providers, and some interesting internet pricing plans.

Currently, to use Viber for a fair bit you need a fairly high FUP (fair usage policy) limit on your phone (carrying voice digitally takes a lot of bandwidth). Carriers might introduce some kind of a graded payment structure such that they can partly recover (through higher internet charges) the lost revenues thanks to lost call charges.

If any mobile phone operator is reading this and needs help on devising such pricing mechanisms, feel free to use my consulting services. Among other things in the past I’ve done revenue management for airline ticketing and cargo (the holy grail of revenue management) while working for Sabre – the pioneer in revenue management.