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 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.