How much do you really know about 4G data service on your smartphone? Did you know that it not only provides you with faster data, but is also cheaper for cellular carriers to deliver? And yet it still costs you the same or more as slower 3G service?

Probably not. Here’s why.

The average user doesn’t have much of an idea what 3G or 4G means beside “one is newer and faster.” And why should they? Carriers use 3G and 4G more as marketing terms than technical ones, and basically all of them have lied (with official blessing from the International Telecommunications Union) about what a 4G phone actually gets you. The “real” definition of 4G, something that worldwide carriers have not yet accomplished, are download speeds of 1 gigabit per second in a fixed location and 100 megabits per second while in motion.

However, the technical infrastructure of how efficient 3G works is compared to 4G is where it gets really interesting. The ITU—a branch of the United Nations that acts as the wireless global standards body—shows that as each generation of cellular technology is developed, it’s not just a better, faster experience for users. It’s also easier and cheaper for carriers to deliver.

How Carriers Drink Your Milkshake

The simplest technical definition of cellular speeds refer to how much data you can transfer per second. With the updated technology that carriers are equipped with in the fourth generation, known as Long Term Evolution (LTE), they’re able to deliver significantly more bits per second, which means a better experience at half the effort.

For a metaphorical example, imagine you’re drinking a milkshake. With a thin straw, it’ll take a long time to drink a thick, ice-cream based beverage. But with a thicker straw, you can drink it much more quickly. 4G is kind of like having a thicker straw.

The ability to move more bits of data faster is measured by something called spectral efficiency (also known as spectrum efficiency or bandwidth efficiency). Spectral efficiency is a measure of the rate at which information flow and improves with every successive cellular generation.

Steven Stravitz, founder of Spectrum Management Consulting, is a former engineer who studies emerging technology trends with a focus on wireless and mobile. Here’s how he explains the nuts and bolts.

“Let’s say that a cell site operator allocates a 10 megabyte channel of wireless spectrum. In a 3G network, you should be able to download 10 megabits per second. In a 4G network, since it’s more efficient, you should be able to get 15, which is a 50 percent increase in efficiency,” Stravitz said.

In other words, advances in cellular technology mean that carriers can get 50 percent more capability while using the same amount of bandwidth already allocated to them. 

That all makes sense from a technical perspective, but in reality, 4G LTE speeds are more difficult to define. LTE speeds vary based on the amount of spectrum available to a particular carrier, the type of LTE being deployed and how the carrier handles spectrum between downlink and uplink from cellphone to cellular towers.

Cellular carriers also have varying degrees of strength when it comes to backhaul, the infrastructure that moves data between cell towers and the Internet. Some carriers have excellent backhaul on 4G networks (AT&T and Verizon, notably) while others are still building it out (Sprint).

Yes, They Drink It All Up

Users don’t know about the technical side of cellular spectrum efficiency. So they’re content paying just as much for 4G phones as they did for 3G. In some cases, like with Republic Wireless, they actually pay more—the company has a $25 3G plan and a $40 4G plan.

From a business perspective, 4G services and technology are very profitable for carriers. Foremost, the ability to slap “4G LTE” onto devices helps sell smartphones and make fun television commercials. Second, consumers want “4G,” even if they don’t actually know quite what that means. The carriers are delivering faster service with higher margins, and pocketing the rest of the money from users who think it’s a deal. After all, doesn’t it just make sense to you to pay as much or more for better service than you were getting?

In the U.S., carrier profits are bigger than ever for a variety of reasons, but better margins on its core cellular product don’t hurt. For instance, Verizon’s profits in the first quarter were nearly twice what they were in the first quarter of 2013, up to $3.95 billion from $2 billion.

Of course, in a competitive market, rival carriers would try to siphon off each other’s customers by offering cheaper service until they bled away all that extra profit. That this doesn’t seem to be happening tells us something interesting about the U.S. cellular market.

The Economist had an interesting chart in October 2013 showing that consumers in the U.S. pay far more for cellular plans with just 500MB of data than almost every other country. Cellular plans in the U.S. with 500MB of data cost about $85. Our friendly neighbors to the north, by contrast, pay $40.60 for the same plans. The U.S. has much deeper penetration of LTE than Canada, yet Americans still pay more for that data.

Steve Shaw from Juniper Networks put it in perspective to cellular-focused publication RCR Wireless last year: “Today a gigabit of traffic on Verizon’s network is something on the order of $7.00, $7.50 a gig, in some markets it’s as low as $1.00 or less, and so in those particular cases just pricing based on bandwidth isn’t enough,” Shaw said.

Essentially, the U.S. carriers are able to gouge consumers even though the cost per bit on their networks is technically going down over time. The carriers will contend that they need to charge what they do because they investing in the infrastructure of the country. But once all the base stations are built, all the backhaul is optimized, will prices actually go down?

Will consumer knowledge of the way the technical side works change the way carriers charge for 3G and 4G? Probably not, said Stravitz. 

“I think something that doesn’t get discussed much is the elasticity curve,” he said. “What price points people pay dictate the usage, so there’s a tie between the two. They haven’t dropped it down because they really don’t need to. The tie between how people react and what they pay is extremely strong, so operators can meter usage in essence, by the rate plans they offer.”

However, it’s something to consider in the upcoming decade, when the next generation of  becomes a reality. Our phones will be faster, cheaper, and easier to produce, but carriers will only get richer.

Lead photo: The Wardenclyffe Tower, an early wireless transmission tower designed by Nikola Tesla, courtesy Wikipedia Commons. 

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