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The bottom line on high wireless prices

04 Nov

smoking-gunIn two weeks time, I’ll be taking part in a panel discussion at the International Institute of Communications’ annual conference in Ottawa. The topic of conversation will be familiar to readers here as it will focus on “facts versus myths in Canada’s telecom sector,” which I’ve written about extensively in the past. The other panel participants will be financial analysts Jeff Fan and Dvai Ghose, respectively of Scotia Capital and Canaccord Genuity, and telecom consultant Gerry Wall of Wall Communications, with business journalist Deirdre McMurdy moderating.

Given the craziness of this past summer, one of the subjects that’s sure to come up for debate is wireless pricing in Canada. Some of the panel participants have argued that prices are not high in Canada and that the country’s world-leading average revenue per user can be explained away by the fact that Canadians simply use their phones more. Just as someone who drives their car a lot will inevitably end up with a bigger gasoline bill at the end of the month than someone who only does so sparingly, so too are big Canadian wireless bills the result of lots of blabbing, texting and surfing, or so the argument goes.

As I’ve written before, there is an element of truth to that notion, since Canadians do in fact use their phones a lot. But the rationalization only works up to a certain point, since people in several other peer countries use their own phones as much as Canadians or more, yet see lower bills at the end of the day. That’s a clear indicator of high prices.

It doesn’t take a PhD in economics to prove this – just a few minutes of web surfing. A few days ago, I checked out how much it costs to obtain and use two of the most popular smartphones going – the iPhone 5S and the Galaxy S4 – with some of the biggest carriers in English-speaking countries. I shopped for a common plan that provides unlimited talk and text and one gigabyte of data on a two-year contract. By the way, it’s worth noting that such comparisons are now easier to make since the Canadian Radio-television and Telecommunications Commission banned three-year contracts – prices may have gone up in Canada as a result, but it’s now possible to look at apples versus apples, no pun intended.

First up, here’s the iPhone (all figures in Canadian dollars):

iphone-prices

As is clear, Canada isn’t the most expensive place to own a 5S – New Zealand is – but it’s up there. What’s most notable, though, are the discrepancies between New Zealand and North America and the other three. In the UK, the iPhone can be had for almost nothing up front and then, for about the same monthly fee, users get eight times the data. The situation is similar in Ireland, where users get unlimited data. Optus in Australia supplies fewer minutes – although realistically, 600 is more than enough for just about anyone – but is literally giving the iPhone away.

Apple’s device is a special case, however, and not always the best comparator of prices, even though it is the most popular smartphone with consumers. The company demands high margins, which means carriers inevitably have to charge more for it, hence the higher-than-expected prices in the chart above. A truer picture emerges when comparing less onerous, and slightly less new devices. Here’s the Galaxy S4, with the same terms as the iPhone:

galaxy-prices

AT&T in the United States is only slightly more expensive than Rogers in Canada, but the gulf between those two and the rest is rather noticeable when looking at what users pay for their devices up front. North American carriers are extracting a rather large up front fee while the other carriers are basically giving the S4 away – it’s almost $800 cheaper to own an S4 for two years in the United Kingdom than it is in Canada. That’s a lot of bangers and mash. It’s worth repeating that this is the reality that Guy Laurence, outgoing chief executive of Vodafone UK, is inheriting when he takes over as Rogers CEO in December.

The Canadian carrier isn’t the most expensive in the two charts above, but average them together and guess what – it sure is. Things inevitably look worse for Canada when more countries are added to the comparison, as just about every international study has found.

That’s not the end of the story, though. The real smoking gun on high prices lies in the usage-versus-ARPU figures. As is clear from the prevalence of unlimited talk and text plans popping up everywhere, carriers are now pricing mobile service almost solely based on monthly data allowances. Every single study performed over the past few years has noted that mobile data usage is growing quickly everywhere in the world, with most growth over the next few years in fact expected to happen outside of North America and Europe.

If heavier usage does indeed equal higher ARPU, as Canadian carriers and their supporters argue, that should mean that average revenue per user is going up for carriers everywhere, right? That would be the logical result – except it’s the exact opposite of what’s actually happening.

Here’s year-over-year ARPU growth by region (plus Canada highlighted), as of the first quarter of 2013, according to the Bank of America Merrill Lynch Global Wireless Matrix:

arpu-growth

A few other facts to add to this mix: despite claims to the contrary, Canada isn’t all that special in terms of smartphone adoption. According to the Wireless Matrix, the country’s smartphone penetration as a percentage of the population was 37 per cent, which is slightly below the developed world average of 39 per cent. The percentage of revenue that Canadian carriers are gleaning from data is similar – 41.6 per cent, or a fraction higher than the developed world average of 41.4 per cent.

To put all of the above into the simplest terms possible: mobile usage is growing everywhere in the world, yet carrier revenue per user is only going up in North America and particularly in Canada. In other words, despite big growth in mobile data usage, it’s getting cheaper to use phones everywhere in the world except in Canada and the United States. Combined with the phone comparisons above and the data and smartphone adoption numbers, that’s pretty solid evidence that high prices – not just in Canada, but also in the United States – are indeed fact and not myth.

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11 Comments

Posted by on November 4, 2013 in mobile, telecommunications

 

11 responses to “The bottom line on high wireless prices

  1. ARPU, with emphasis on the pee-ewe

    November 4, 2013 at 1:08 pm

    “Just as someone who drives their car a lot will inevitably end up with a bigger gasoline bill at the end of the month than someone who only does so sparingly…”

    That analogy breaks down in the wireless market. We all pay the same gas price per litre regardless of how much driving we do. In the wireless sector, it’s all about bizarre pricing plans. Prepaid users get the least value for the buck. By far. If you think your $80/month plan with one of the big three is low value, switch to prepaid and get your eyes opened. It’s like one person paying $1.30/litre at the pump and another paying $10/litre.

    Only in the eyes of the carriers does penalizing the people who put the least burden on the network make sense. What they’re doing is ensuring that their ARPU is inflated because prepaid plans are low value and expire. Even if you never use your phone, you’ll still pay $10-$15/month.

    Given that the true costs of providing the service don’t seem to be reflected in pricing, I believe the carriers simply decide what ARPU they want and make up plans that result in hitting that target. So if we have a higher ARPU in Canada, it’s because the carriers want it that way, not because our costs are higher.

     
    • Ben Klass

      November 5, 2013 at 5:01 pm

      bump. Also, when you’re driving a car you’re on public roads.

       
    • Ryan

      November 10, 2013 at 10:12 am

      It may be the least value per buck, but if at the end of the month I’m paying $20 instead of $85, I’m still ahead.

       
    • arahman84

      November 10, 2013 at 11:36 pm

      Also, oil 1. is limited, and 2. takes effort to manufacture. Compared to that, the cost of wireless is very largely 1. the initial cost of putting up the infrastructure, 2. providing the bandwidth, and 3. maintaining/upgrading the infrastructure. There’s little to no per-byte cost in providing internet access, wired or wireless.

       
      • ARPU, with emphasis on the pee-ewe

        November 11, 2013 at 10:27 am

        Oil is a finite resource. Bits are limitless. The only thing that affects the cost of providing a network link is when the link approaches congestion and needs to be upgraded to either a faster link, or another link to be added. That means it’s the bits per second, not the number of bits. A link running at 0.1% busy costs the same to operate as one running at 90%. People should be charged for data only during peak times because that is what drives network upgrades. Off peak, the cost is zero.

        But measuring bytes is easy for the carrier, simple to understand for the consumer, and a worthless indicator of cost. But when have the carriers ever priced their services relative to their cost?

        Heck, Bell is still charging for touch-tone and call display. Two pure profit line items.

         
  2. Kevin Tolen

    November 9, 2013 at 4:15 pm

    There is a massive difference between cell phone plans in Canada vs. the USA: on US cell phone plans there is simply no such thing as long distance. On a plan with 400 minutes in Maine I could call Hawaii, Texas, California, and it’s all included. On a plan with 400 minutes in New Brunswick to call Vancouver, Calgary, or St. John’s with those minutes would probably at least double my bill.

     
  3. Martin

    November 9, 2013 at 5:56 pm

    I’m surprised there’s no mention of the growing trend of upfront unlocked phone purchases. Google has been pushing hard with its affordable Nexus 4/5 smartphones to make it a reality in North America, as Europeans have been doing for years with contract-free, prepaid SIM cards. For example you could recently buy a Nexus 4 for $199 or a newer Nexus 5 for $349 and in the UK get unlimited LTE data and 600 minutes for a prepaid £15 ($25, including tax) a month. Not just in the city like Wind/Mobilicty, but actual unlimited data in the countryside of the Scottish Highlands! That’s with Three (3), I believe first to deploy 4G/LTE in the UK.

    Comparing the Nexus 5 for example, that’s $391 (w/tax) upfront plus $25 for 24 months, for a total UK cost of ownership of $991. Buy a second-hand few months old Nexus 4 and see that cost chopped by $200.

    In Canada? How about $391 upfront plus $86 (-10% unlocked, w/tax) for 24 months, for a total cost of ownership of $2455. 250-300% the cost of the same contract-free UK service.

    That’s what’s ridiculous about Canadian pricing. Device subsidy lock-in, hiding the device cost and taking insane margins regardless of whether you actually own such devices. On top of that, when we travel we can’t use a foreign SIM card since the phone’s locked, forcing us to pay outrageous roaming fees.

     
  4. Jamaal Julien

    November 9, 2013 at 9:04 pm

    pay as you go in the UK is amazing.. I’m a UK university student coming from Toronto.. while i’m in London I pay 22 canadian or 12.90pounds/month(Month to month) with 3 Mobile for 3000(unlimited text) 300 minutes and unlimited data.. For someone who doesn’t want to sign a contract for 2 years its perfect compared to what you get back home.. Just saying.

     
    • Jamaal Julien

      November 9, 2013 at 9:05 pm

      It’s sad seeing these prices and plans then going back home to get a plan and getting raped with fees and getting nothing.

       
    • ARPU, with emphasis on the pee-ewe

      November 10, 2013 at 11:39 am

      I don’t think there are any prepaid plans offering unlimited data so let’s assume it’s 2 GB. There are also pay-by-the-minute plans but it seems you’re on a monthly plan. Since Telus has unlimited talk after 6 PM on evenings, and on weekends (because people don’t talk as much then) let’s assume 2/3rds of the talk is paid, so 200 minutes of your 300 min/mo. Long distance is not included in Canada so it adds additional 50¢/min on Telus, 35¢/min on Virgin Mobile.

      Telus has a $30 plan with only evening/weekend talk, unlimited text, 200 MB. You have to add a couple of 1 GB data add-ons so that adds $60. But, your per-minute rate drops from a whopping 50¢/min to a “mere” 15¢/min so 200 minutes costs you another $30. Total Telus price to match your $22 price is $120.

      Virgin Mobile has a $25 plan with 100 minutes + 30¢/min overage, unlimited text, 100 MB. So 200 minutes will add $60 and 2 GB of data is $60, so this “low-cost” carrier is $145.

      Of course, playing around with the data usage is the biggest cost factor. Using only 1 GB of data would mean Telus is an “affordable” $60 and Virgin “just” $85. These prices are high enough to have you looking at postpaid plans.

      Since Canadian data rates are so punitive, I rely solely on public wi-fi and it’s getting easier all the time. You can get 6 GB for $30 on special offers, which hasn’t gone down in 5 years, so paying $30 for only 1 GB is highway robbery. If you don’t get a data plan with Telus, it’s $2048/GB. That’s fair, right?

      In the UK you can often also bundle home phone and TV for a small fraction of the price we pay as well.

      Our robber barons thinks we should be paying even higher prices.

       
  5. Newfie

    November 9, 2013 at 9:28 pm

    one thing dont look right is Canada part of North America or not??????

     
 
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