New wireless code could hike smartphone price

There is much for consumers in the CRTC's new code of conduct for wireless providers, tech specialist Peter Nowak writes. But ending the widely disliked three-year service plan could also bring on a bit of sticker shock for the newest smartphones.

Overall, though, new CRTC rules should help consumers

New wireless code of conduct

10 years ago
Duration 4:15
Technology journalist Peter Nowak talks about Canada's new code of conduct for wireless companies

If you're thinking about getting a new smartphone, you may want to wait until Dec. 2.

That's when the new wireless code of conduct — a host of measures designed to protect consumers from cellphone companies' more unseemly practices — kicks in for all new or extended contracts.

Unveiled Monday by the CRTC, the new code of conduct will usher in several consumer-friendly rights, such as caps on roaming and data charges, as well as, most importantly, an effective ban on three-year contracts.

Such long deals, which are almost unique to this country, were singled out by thousands of Canadians during the CRTC's public consultation process as their biggest problem with wireless services.

But doing away with these longer deals could also raise the cost of some smartphones in the short run, as we are already seeing with certain carriers.

Fido, for example, is selling the recently released Samsung Galaxy S4 for $450 on a two-year contract, whereas parent Rogers is offering the same device for $199 on a three-year deal — a price disparity that could highlight what things will look like after Dec. 2.

Cancellation fees

At the core of the issue is how wireless providers apply subsidies on the devices they sell. When a consumer buys a cellphone today, the carrier typically discounts the upfront cost in exchange for a service contract, which is often three years on the latest devices.

The carrier then recoups the cost of the phone — which can be around $700 on the high end — through the monthly service fee over the term of the agreement.

If a customer wants to get out of the contract before the term ends, he or she usually has to pay a cancellation charge, which can be a combination of the remaining amount owed on the device plus arbitrary penalties.

The new code will require providers to clearly spell out in writing how much of a subsidy is being given, and how much will be deducted from the amount owing for each month of the contract.

Subsidies must be divided evenly over a maximum of 24 months and carriers won't be allowed to charge extra cancellation fees beyond the recouping of those subsidies.

So, let's say you get a $700 phone, pay $200 for it up front and sign on to a two-year contract. The remaining $500 balance would amount to $20.83 per month, which means that if you wanted to cancel after a year and a half, you'd have to pay off about $125. After the two years, the balance owing would be zero.

Will upfront phone prices rise?

Carriers will still be free to offer three-year contracts, but with customers able to walk away after 24 months without penalty, there will be little sense in doing that. This will likely mean that upfront prices on phones will go up.

The new wireless code will create 'a more dynamic marketplace,' CRTC head Jean-Pierre Blais says. (Reuters)

Over all, though, the CRTC's code could actually be a positive development for smartphone users, for two big reasons.

Firstly, as two-year contracts replace three-year deals as the norm, prices on both services and devices in Canada will be easier to compare against other countries. It will be simpler to see if Canadians are overpaying compared to, say, Americans.

Take that Galaxy S4, for example. AT&T is selling the same device for $199 on a two-year contract in the U.S. That's the same as Rogers, but with a contract that's one year shorter.

Both the federal government and the CRTC have been under pressure to do something about high bills, hence the wireless code. Better comparative data will likely add fuel to that fire.

Carriers might argue that prices in Canada need to be higher because it's a smaller country with fewer potential customers, but that's where comparative data will again come in handy.

With contract lengths in line with the rest of the world, it'll be easier to make apples-to-apples comparisons with pricing in even smaller countries, such as New Zealand or Ireland.

Large profit margins

Secondly, the focus on overall pricing is starting to shift to the manufacturers themselves, some of whom are commanding huge profit margins on their devices.

While computers, televisions, tablets and other categories have come down dramatically in price in recent years thanks to continually cheaper components, smartphones have gone in the opposite direction.

Rather than pointing their fingers solely at carriers, consumers are likely to soon start wondering why their phones cost more than any other gadgets they own.

Some device makers are taking this to heart. Last week, Google-owned Motorola effectively declared war on the likes of Apple and Samsung by promising lower-cost high-end phones.

The company will release its lower priced Moto X, a high-end device, later this year in an effort to drive down the overall cost of smartphones.

"Those products earn 50 per cent margins," said Motorola chief executive Dennis Woodside at the D11 conference in California. "We don't necessarily have those constraints. Those [margins] will not persist."

In Google's case, it makes more money when people use its online services, as opposed to simply buying its hardware.

The company therefore has an interest in getting as many of its phones into people's hands as possible, which is a disruptive pressure that will likely force competitors to follow suit.

If this happens, the consumer need for subsidized contracts should lessen as well.

Further wallet relief

In the meantime, the CRTC's code will provide some relief to consumers' wallets in other ways.

International data roaming fees will be capped at $100 a month, unless the customer expressly agrees to more. That should prevent those horror stories about travellers returning home to bills in the thousands of dollars.

Data overages — or extra fees for going over monthly usage limits — will similarly be capped at $50, unless the customer expressly agrees otherwise.

Contracts will have to be written in plain and clear language, and customers will get a 15-day trial period on new services, within which they can cancel and return their device with no penalties.

Carriers will also have to suspend billing for customers whose phones are being repaired.

If there's one thing the CRTC missed, it's the fees for unlocking phones. The code will require carriers to unlock subsidized devices so that they can be used on other networks after 90 days, or immediately if the customer has paid in full for the phone upfront.

The rules expressly permit carriers to charge fees for unlocking and they don't set a cap on them, an omission that could be abused. Some providers currently charge up to $75 to unlock a phone — that could theoretically go up.

Otherwise, the regulator has done a fine job in addressing customer concerns. The new rules should do much to rein in some of the industry's worst excesses, although they won't do much to fix the underlying competitive issues.

That problem now falls to the federal government.

In 2008, Ottawa tried to induce more competition with special spectrum licensing rules that ultimately led to the formation of smaller carriers Mobilicity, Wind and Public Mobile.

Five years later, Telus wants to acquire Mobilicity, although the federal government said Tuesday it won't allow Mobilicity to transfer its wireless spectrum to larger rival Telus, which means the companies' $380-million takeover is nixed as currently constructed. Meanwhile, Wind and Public Mobile are reportedly running out of money and also looking for a buyer.

Canadian carriers already lead the developed world in average revenue per user and post some of the highest profit margins, according to the Bank of America Merrill Lynch Global Wireless Matrix. Both measures are expected to climb higher this year, especially if the new carriers disappear.

The CRTC's wireless code is a good bandage, but it's now up to the government to heal the wound.