Wireless code effects include higher prices, slow customer growth: analysts

More than eight months after its implementation and more than a year after it was announced, effects of CRTC's wireless code include higher prices and slower growth in mobile-service subscribers, say analysts. "The most obvious overall effect is it's raised consumer prices by $5 per month," Canaccord Genuity telecom analyst Dvai Ghose said in a phone interview. That's due to the provision that limited the amount of time carriers could tie customers to binding contracts to two years, which effectively killed the three-year deals that had become standard. This gave carriers a shorter time to recover subsidies they provide to lower the retail cost of wireless devices. While there's a wide range of pricing between plans, and even differences between regions, 3Macs analyst Troy Crandall said the typical increase in plan rates since the code came about is generally between $7 and $8 a month. He said the wireless code gave carriers an "opportunity" to raise prices beyond what was needed to compensate for the shorter subsidy-recovery periods. "The disruption of this change from three years to two years has created confusion in the marketplace for consumers, which ... gave an opportunity to take advantage of price increases on top of what was required to cover the initial subsidies over the term," Crandall said in a phone interview. He added that service providers could "use the government as a scapegoat and blame them for the higher prices because of the two-year rather than the three years." Scotia Capital analyst Jeff Fan said carriers began adjusting their plans to accommodate the shorter contract terms even before the code took effect on Dec. 2 last year. The result was a slower rate of customer growth for wireless services, and a slower rate of people upgrading to higher-end phones and plans, he said. "Because the carriers have to recover some of those economics through higher rate plans and higher handset prices, that actually slowed down, I think, the volume of activations that would have maybe taken place in the marketplace," Fan said in a phone interview. "Wireless penetration in the last four quarters has been effectively stalled at 80 per cent," he added. "It hasn't really grown in the last four quarters. ... Bottom line is, from a consumer perspective, the higher prices have probably slowed the adoption rate and it slowed the rate of upgrade." Rogers Communications Inc. spokeswoman Jennifer Kett acknowledged in an email that her company has adjusted prices to reflect the shorter time in which subsidies are recovered, and added that the changes brought on by the code has slowed the rate of subscriber growth. However she said the code overall has “not had that much impact as we implemented many of the code provisions well before the code was introduced.” BCE Inc., in its second-quarter report, cited the higher rates it implemented in reaction to the wireless code as slowing growth in the number of its wireless subscribers. Crandall said, to the benefit of carriers, there has also been less subscriber churn, partly as a result of the code, as consumers see a lack of enticing deals among competing carriers when their contracts run out. Ghose said he has not seen much reduction in subsidies since the wireless code became reality, and that's largely because some vendors, such as Apple Inc., force carriers to offset the cost of devices for end users. "When you buy an iPhone from Apple, they say to , 'You have to buy it at $700 and you have to sell it at $200, roughly. So you have to incur a $500 subsidy. How you cover that subsidy, we don't really care.' " Crandall agreed there doesn't seem to be much evidence of carriers backing off on device subsidies. "Subsidies are what draw the people in," he said. "You've got to have that nice magic price point. That's what grabs everyone's attention. That's how you get new subscribers; the illusion that this is a pretty affordable phone." Ghose, Fan and Crandall all agreed that requiring that customers face no cancellation charges for walking away from contracts after two years was the most significant part of the wireless code, which was announced June 3, 2013. Other aspects included a cap of $50 for overage fees on data, a limit of $100 on international roaming charges for data, a requirement that carriers unlock devices for customers upon request and a 15-day grace period in which customers can return devices without facing penalties. Fan said the caps on data charges have had minimal impact on carriers. He said the extreme bills some customers were facing as a result of high usage at home or abroad were more damaging to the industry's reputation than an opportunity for any kind of revenue windfall. Crandall concurred, saying: "If this guy has a $5,000 bill, they'd probably call up and say, 'Look, we'll reduce it down to $600 or $800.' Chances are he was never paying the full price in the end anyways." Rogers' Kett downplayed the impact the data caps had on her company, saying the "majority of our customers do not go over their domestic data limit," and roaming data caps "did not have a significant impact as we had already introduced changes to our roaming offerings like the $7.99 flat U.S. data rate, improved travel packs, lower international pay-per-use rates, etc." Fan said the requirement of carriers to unlock phones for customers, along with the two-year contract limits, has the effect making it easier for customers to change providers. "With that provision in place, you can now take your phone to a carrier and, even though you're on contract, they'll still unlock it," Fan said. "And then once you're off contract, you can pick your own carrier or give the phone to someone else and they can pick their own carrier. "So I think it encourages less people on contract. It might reduce, over time, the number of people that are going to be on two-year contracts." Ghose agreed that requiring carriers to unlock phones makes it easier for people to switch service providers, though he added that most carriers were unlocking phones for their customers anyway. He added that the code has not had a significant impact on bolstering competition in Canada's wireless industry, though it might start to have an effect next year when the first wave of customers begin taking advantage of their ability to abandon contracts after two years. However, Ghose said carriers will likely be offering incentives for device upgrades and executing other strategies before that time to minimize the exodus. Telus Corp. CEO Joe Natale, when discussing his company's second-quarter earnings report last week, acknowledged there would be a "spike" in contracts coming to an end next year, as many two- and three-year contract expire around the same time. He said that it would be a "one-time impact," though many customers were being renewed mid-contract with upgrade opportunities. Fan said the code, overall, has improved the conditions for those that seek to compete with the three big carriers, Bell, Telus and Rogers. "At the margins, I think it helps if you are looking at potentially investing in the fourth operator because you don't have people locked in three-year contracts, you have more, potentially, unlocked phones and you have more, potentially, people off contract," he said. "Those three are major factors on (a fourth carrier's) ability to execute their business plan in getting subscribers." — With reporting by Derek Abma at dabma@thewirereport.ca and editing by Anja Karadeglija at akarad@thewirereport.ca

Wireless code effects include higher prices, slow customer growth: analysts

News | August 12, 2014

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Wireless code effects include higher prices, slow customer growth: analysts

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