July 17, 2013 3:14 pm

New wireless contracts come with higher monthly bill

The introduction of new two-year contracts from Telus Corp. may spark higher costs for customers at the industry’s other big carriers, analysts suggest, inflating monthly bills for mobile subscribers. The need to recover costs more quickly on expensive smartphones is to blame, Telus said Wednesday.

Canadian Press

New or renewing Telus Corp. customers may shake their fist at the Canadian Radio-television and Telecommunications Commission (CRTC) when the first bill arrives.

The same urge may overcome customers at Rogers and Bell, as well, analysts say, as the biggest players in the industry shift to two-year contracts.

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Vancouver-based Telus introduced this week new two-year terms in response to a new code of rules established in June by the CRTC that places limits on contract lengths among other conditions.

The full list of new rules doesn’t officially come into force for a couple of years, but some basics like new contract lengths have to be in place by December while Telus is ahead of others in rolling them out.

And prices are headed up for at least some.

The new Telus rate plans will cost at least $5 more a month on standard smartphone contracts for those who upgrade to a new device, and the amount moves higher on certain plans. Customers who already own their own phone won’t pay additional fees, Telus says.

“Cutting through the details, we believe the new plans reflect higher [revenue per customer] to neutralize the impact of contracts moving from three years to two years,” Jeff Fan, an analyst at Scotiabank said. (The Scotia analyst has set out two plan comparisons in the graphic at the bottom of this post.)

Adam Shine, another industry analyst at National Bank added: “Costs will be moving up rather meaningfully in the short term to accommodate two-year plans.”

Aside from the risk of angering some customers who want an upgrade but don’t necessarily want to pay more for the new phone, higher wireless bills may draw the ire of a federal government keen on keeping prices generally lower than they have been in the past.

Telus said Wednesday the new plans are a necessary response to recover costs more quickly on expensive smartphones sold to customers at an upfront discount. The carrier then collects the remaining balance through monthly payments, a Telus spokesman said.

“We have kept the pricing comparable to what we had. There is a moderate increase to the device balance charge because of the shorter amortization period,” Shawn Hall, a spokesman for Telus said.

The entrenched industry model for selling phones is for the carrier to offer new devices for a cheaper upfront fee than what the hardware actually costs. In exchange, a customer agrees to cover the remaining balance over the life of a multi-year contract, similar to a home mortgage.

“It would be like having your home mortgage amortized over a shorter period of time. Your payments go up,” Hall said. “We’re being very transparent about what the customer is paying for.”

To make the price adjustment more palatable to customers, Telus says the plans come with unlimited nationwide voice and text services – a standard feature among new entrants like Wind and Mobilicity but until now not something automatically offered by any of Big Three wireless brands.

Rogers is planning to launch new plans of its own, a spokeswoman said Wednesday.

“We will be introducing new two year contracts and will share more details shortly,” Jennifer Kett, a spokeswoman for the country’s largest carrier said.

Bell is said to also be moving quickly. “We believe Bell is in the process of introducing new plans,” Fan added in a note.

The shift in pricing has possibly also opened a window for the carriers to generate bigger profits in the short term, some suggested.

While the new rules place a cap on certain expenses like data overage charges and fees collected on items like roaming, the code doesn’t come into force until June 2015 — meaning current roaming rates and overage fees will remain in place. Carriers might also elect to offer less generous discounts up front.

“Any pressure on voice revenues [at Telus] could easily be offset by higher [profit] margins driven by reduced upfront device subsidies,” Dvai Ghose at Canaccord Genuity said.

“Since the financial impact of the three-year contract ban is not expected to occur until June 2015, the plan changes could actually be accretive to [average revenues per user] and [profit] margins in the near term,” Scotia’s Fan said in a research note.

A comparison from Scotiabank on standard smartphone contracts based on Telus’ old three-year plans and the carrier’s new two-year contracts.

[UPDATE. Correction, 4:32 p.m.: In an earlier version of this story, it said a new wireless code for carriers isn't coming into effect for two years, including the implementation of two-year contracts. While other elements of the code don't come into effect until June 2, 2015, new contract lengths must be in place by Dec. 2, 2013.]

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