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Competition Not Contracts: The Real Reason Canadian Wireless Prices Are on the Rise

This week, Telus and Bell announced new wireless pricing plans based on two-year contracts (Rogers has said their plans will be released shortly). Those plans – particularly those from Telus which seems to be taking its suggestion that Canada should be the most expensive wireless country seriously – feature higher prices, which some claim are the product of the shift from three-year contracts to what is effectively a two-year maximum under the new CRTC wireless code. The narrative behind these cost increases is that consumers are amortizing the cost of their device over a shorter period of time and therefore can expect higher monthly fees. This argument is perfect for the carriers as they get to blame the CRTC (and by extension, the Competition Bureau, consumer groups and consumers themselves) with an “I told you so” for the increased prices. Yet the higher costs are not strictly a function of shorter contracts, but rather a product of Canada’s uncompetitive marketplace. 

Many other countries have two-year contracts with cheaper rates and bigger device subsidies. This is because consumer price is not primarily a function of contract length or device cost, but rather marketplace competition. For example, Spain’s wireless pricing has been dropping in recent months as their four major carriers find consumers more aggressively shopping for better prices or cancelling their wireless services altogether. In response, all four Spanish carriers are dropping prices to stop the churn and attract new customers. For example, BGR reports that Yoigo (owned by Telstra) has offered free iPhone 5′s on two-year contracts for as little as 25 euros (C$34) per month (the article emphasizes how competition through innovative pricing has led to profit declines at incumbent carriers). The decline in price is illustrative of why it is competition, not “regulatory costs” or device subsidies, that are the key factor to consider.

[Update 7/27: A commentator below helpfully points out an inaccuracy in the BGR article since the Yoigo price was for phone only and not service. A fuller comparison of the Spanish offer is as follows: Yoigo for 24 months of 25 euro phone + 25 euro service (unlimited voice + 1 GB data) is C$1636.24. Add another 12 months of service for C$409.56. Total three year cost is $2047.80. Bell's current offer on an iPhone 5 with the same voice and data for three years is $179.95 for the phone, $35 for the activation, and $70 per month of the service for 36 months. Total three year cost (not including taxes) is $2734.95.]

The Canadian competitive environment for wireless is ultimately linked to two issues: competitors and consumer switching costs. The two factors present a classic “chicken and egg” dilemma as there is a need for consumers to be able to switch in order to support new competitors, but without robust new competitors there is no one to whom they can switch. The Competition Bureau highlighted the problems of switching costs in its submission to the CRTC:

The restrictive, long-term contracts used by existing service providers may impose switching costs on consumers. There is extensive economics literature on switching costs that demonstrates how these costs harm competition and reduce consumer welfare. In general, switching costs may inhibit competition because they can:

  • Counteract efforts by new or recently established service providers to attract customers. In Canadian markets for mobile wireless services, where a small number of large incumbent service providers have created switching costs for a vast majority of consumers, new entrant service providers are forced to provide a competitive offer that compensates for such switching costs in order to attract customers. This may make participating in these markets less profitable, and potentially unprofitable, for these service providers;
  • Reduce the incentive for established service providers to discount their prices and innovate. The pressure on service providers to offer better prices or innovate is a function of consumer mobility. If consumers cannot switch service providers, then efforts by service providers to lower prices to attract new customers are likely to be less fruitful. If only a small portion of wireless consumers have the ability to switch service providers at a given point in time, then a strategy of lowering prices, innovating, or otherwise bringing competitive forces to market may be less profitable than a situation where the promoting service provider can attract a greater number of customers; and
  • Raise rivals’ costs. Since the fixed costs of entering into Canadian wireless markets can be large, entrants may need to attract a significant number of customers in order to achieve a scale and scope of production necessary to compete with incumbent service providers. If entrants cannot attract customers due to high switching costs, then these entrants may not be able to become effective competitors.

The CRTC wireless code, with two-year contracts as an effective maximum, endeavours to reduce switching costs (similarly, unlocking requirements in the code and the implementation of wireless number portability several years ago removed other barriers). However, the code alone cannot solve the other half of the competitiveness problem: the need for viable alternatives. Without new competitors, the incumbent carriers will use this opportunity to increase monthly costs with contract length providing a convenient cover.

Given their views that Canadians should be paying the highest rates in the world, the latest increases should not surprise. However, no one should be under the illusion that two-year contracts mandate increased prices. There is certainly a cost associated with a device subsidy, but the question is who bears that cost. In highly competitive markets, much of the cost may be borne by the carrier, with the device treated as part of the customer acquisition or retention cost. In uncompetitive markets like Canada, carriers feel free to pass that cost along to customers, safe in the knowledge that they currently have little alternative but to pay it.

19 Comments

  1. Richard Rudy says:

    Subsidized phones are a myth
    I love how the cariers are increasing their rates on two year plans because the device is subsidized. But if I buy my phone outright they don’t discount my plan at all.

  2. The reason for the price reductions in Spain is deflation, not competition. Deflation is the result of severe economic distress that leads consumers to reduce their spending on goods and services. In turn, businesses slash their costs – reduce production, close stores, lay off workers, and postpone investment in new products/services.

    The price reductions in Spain are actually driven by excessive unemployment (>25%) and the macroeconomic deflation that has gripped the entire country, and are not the result of healthy competition.

  3. Yes expensive but in a way legitimate
    Canada is definitely up there in cost for wireless service, but consider that Wireless providers in other countries, take Spain for another example; have significantly lower costs. A key driver of cost for a wireless provider is actually providing the service – towers are expensive to build, power and maintain. Given that Canada has the second largest Geographic area in the world and these service providers are national (as people seem to demand, see the fall of Mobilicity as an example) it makes some sense to me that we have to pay more. Further, while wireless may be expensive these companies provide positive economic impact across the country – gainful employment, provincial investment and secure business models (I.e. they don’t require bailouts from the government)

    As for the subsidized pricing Richard, I k kW TELUS offers 10% discount on rate plans if you BYOD (bring your own device) and I’m sure, given the above stated competitive rivalry, this is or soon will be available on the other major carriers.

  4. Oh great, so if Canada could just fall into a recession we could all get free phones? If only we could all live in the Geist Imagined world.

  5. @Steph

    Thanks for point that out. I don’t know how Mr. Geist missed the deflation issue in Spain as the primary reason for cell phone price decreases. We all know that the recent decline in US house prices was due to a massive financial meltdown and not competition between home builders. Spain’s economy is in far worse condition than the US.

  6. Drive by comments says:

    So explain $10 a month in China?
    So explain $10 a month in China?

  7. evil is evil says:

    $10 per month in China? Poor overcharged users. I live in Peru. I carry three cellphones. I put around $10 on the three each month to keep them active, that is $10 total for three cell phones with different companies.

    Cutthroat competition is actually quite nice.

  8. $10/Month in China
    Population density.

  9. TelcoCartel says:

    Sickening
    Canadians are so sick of the corporate greed & corporate lies! These Telcos are full of shit just like their paid shills commenting at this site.

  10. @Drive by comments

    Why is gasoline $0.09 per gallon in Venezuela compared to $6.50 per gallon in Canada?

  11. Prices
    Deflation is a state of falling prices for whatever reasons. In the case of Spain their economy is in a ditch. Who cares if the reason their prices are going down is due to worry that their services are too expensive? It’s a market force, like competition. Does deflation explain better prices in Australia? Does population density explain it? The problem in Canada is a lack of any sort of pressure due to competition or any other force. We need more competition in the wireless market in Canada, period.

  12. Devil's Advocate says:

    Red Herrings
    You can cling to “deflation” or “population density”, or any other red herring theories you want. The fact is, without any real competition in any market, a limited number of players can and will completely milk you for what you’ll pay.

    Without competition, you have no way to compare your services and pricing to anywhere else that HAS competition.

  13. Already paying more
    So Bell wants us to swallow that their rates need to go up to cover the subsidies? So the iPhone one would buy in the for $199 on a 2 year term in the US is the same iPhone you can buy in Canada on a 3 year term. I realize the dollar isn’t on par right now, but how can they justify additional cost when they were already getting a year worth of lock-in to spread out the cost of their subsidized handsets? Talk about wanting to have your cake and eat it too.

  14. Buy phone at full price, save $10/mth
    All 3 carriers now offer $10/mth discounts on service if you buy the phone outright, or being your own phone.

  15. Misguided Sheep says:

    Spain?
    I know you do not take things like income into consideration when you do your comparisons and I do know that you understand that Spain has an average disposable income about 25% less than Canada?

    From the articlev”Next week, a challenger operator called Yoigo will start selling the iPhone 5 for free with a two-year contract that costs as little as €25 per month.”

    This was an introductory offering (Dec. 2012) to get customers to move to them as they are a startup with less than 10% market share. It was not being matched by anyone nor is it in effect today.

    In fact go to https://tienda.yoigo.com/selforder/especial/smartphones and see thier prices and tell me where you would rather buy a phone, Spain or Canada. The good news is, that the largest data plan, the 2Gig ($54 Cdn/mo) will be sufficient as unless you live in Madrid, there is no 4G network.

    You prove every post that you are indeed a lawyer sir.

  16. Michael, I get the impression that you didn’t actually look at Yoigo’s pricing structure — that instead you just took BGR’s incorrect report at face value.

    You say the 25 euro/month plan includes a free iPhone 5. Sorry, no. (How on earth could they afford to do that, given that Apple charges carriers close to retail for its products?)

    In reality, the 25 euro plan (the rate increases to 30 euros at the end of August)does not include a phone. If you want an iPhone 5, that will run you another 669 euros, or roughly C$910 for the entry-level 16 GB version.

    Personally, I’d rather buy my iPhone 5 in Canada, where it’s $699.

    Oh, and if I’m reading correctly, Yoigo does not offer 4G.

  17. @ Richard Rudy
    “But if I buy my phone outright they don’t discount my plan at all.”
    Actually, telus announced different rates for a subsidized phone vs you having your own phone with the new two year plans. Can’t remember what the discount was tho.

  18. Thanks for correcting the Yoigo information, Michael. Your comparison is fair, but you could also take a look at the new pricing structure that Telus is introducing: buy your own phone (say, an iPhone 5 for $699) and pay $35/mo for unlimited voice and text, plus $30/mo for 1 GB data. Total for two years including the iPhone: $2259. So Yoigo in Spain is cheaper, but only by $200 over two years.

  19. Michael Geist says:

    @Ross
    No, as noted in my update, Yoigo’s two-year cost is $1636. If compared to Telus’ new two-year pricing, it’s over $600 cheaper over the two-year term or nearly the cost of an unsubsidized iPhone 5 in Canada.