Wirelessnorth.ca

Part 1: Weaning from the teat of handset subsidies

I just moved to Vancouver from Europe where I spent many years working in the wireless industry. When it comes to wireless, Canada seems to be quite removed from Europe in a number of ways.

What strikes me is that Canadian wireless carriers are mainly looking at each other in search of best practices. The iPhone offerings, for example, are almost identical between the three carriers, with identical handset pricing and only slight variances in the plans and contract durations. Most of the plan differences are in the small print hardly picked up by the average consumer, and the minutes and SMS included in the different plans vary only slightly. In terms of contract duration, all carriers offer a 3-year contract term and only Telus also a 0-year option. Nobody offers a 1- or 2-year option while I’m sure there is a market for it: Many frequent iPhone users will want to replace their phone much earlier than after 3 years – and I think most of the early iPhone adoptors will agree with this.

Compare with Europe. Most European carriers have the policy of “higher value customer equals higher handset subsidy”, meaning that both the duration of the contract and the level of monthly commitment determine the subsidy and thus the price of the handset at sign-up. Canadian carriers only vary the subsidy with contract duration and do not reward customers for committing to a higher monthly fee: If you sign up for a 2-year contract it doesn’t matter if you take a $50 plan or a $100 plan, you pay the same for your handset even though your “customer lifetime value” might be twice as high. The difference in the total 2-year commitment in this case is $1200, a number that dwarfs the maximum subsidy levels of around $500 that I see in the market.

The first carrier to break this cycle will be a winner: they will be able to attract the high-value customers by offering them lower handset prices, while improving profitability at the same time. Research in Europe suggests that for most consumers consumers the price of the handset is more important than the price of the monthly plan when they sign up for service. This makes it likely that consumers will even agree to a higher commitment in return for a better handset price.

An added bonus for the carrier that picks up on this idea: they will be able to advertise even lower “from” handset prices and eye a more attractive offering for all customers, since this minimum price will be based on the highest subsidy level that is only provided to the most valuable customers.

An enhanced subsidy can take consumers more effort to decide what’s the best for their situation, but in return for that they will get a handset at the price they deserve, so I think that little extra effort is a fair price to pay.

Bart Venlet is a telecom professional who spent the last 14 years working for Vodafone in various roles in Europe and Japan, and is currently looking for a job.

Got other ideas how Canadian carriers and consumers could one day kick their collective heroin habit of handset subsidies and world record contract lengths? Short of, ahem, regulation? jump in the comments. – ed