Rogers subsidy ripoff: Why consumers will pay the price

You know that sweet iPhone you got for $159? If Rogers has its way, you'll be paying more for it. A lot more.

That's because that sweet smartphone doesn't actually cost $159. Head over to Apple Canada's website, for example, and the cheapest iPhone 4S goes for $649. Want the top-dog 64 gigabyte model? That's $849.

Why the difference? One word: subsidies. Carriers like Rogers will only sell you the phone for that low, low price if you sign up for a long-term contract, which in Canada typically runs for three years. If even $159 is too rich for your blood, previous-generation device like the iPhone 4 or 3GS sell for $100, $50 or even free to new contract-holders. The story is much the same for Android-powered devices, BlackBerrys or any other smartphone device available at retail. Cheap phones rule the market.

While you pay a pittance, though, the carrier pays the handset manufacturer like Apple, Samsung or Motorola the full price of the phone, typically anywhere between $500 and $900, and then recoups the subsidy over the life of the contract.

A good deal — for carriers

The revenue math works out well for the carrier as long as customers pay for a full range of data and voice services for the full contract period. Subscribers who spend $85 or more per month — or $3,060 over three years — make up-front subsidies easy to justify. More frugally-minded customers who buy more basic plans — say, $35 per month — make the math a little more difficult for the carriers. As a result, Canada's largest wireless provider, Rogers, says it wants to start shifting away from subsidies.

At the company's annual general meeting earlier this week, CEO Nadir Mohamed said the company is investigating how it can reduce its reliance on subsidies. The company charges $159 for an iPhone on a three-year contract, which amounts to an up-front $490 subsidy in exchange for that $3,000-plus, 36-month revenue stream. But those numbers no longer add up for Rogers. Faced with slipping average revenue per user figures — Rogers made $57.65 per month from each customer, down 2.26 percent year over year — slicing those fat subsidies is a quick and easy way to boost the all-important ARPU and convince investors that the company is doing everything it can to rein in costs and drive efficiency.

Distorted value

The Rogers move echoes efforts in the U.S. to similarly wean customers off of their deceptively cheap devices. The CTO of T-Mobile USA, Cole Brodman, told GeekWire Summit attendees in Seattle last month that subsidies make it harder for consumers to appreciate value.

"It actually distorts what devices actually cost and it causes OEMs, carriers -- everybody to compete on different playing fields," Brodman said. "I think it is really difficult, especially from a consumer perspective, because it causes consumers to devalue completely the hardware they are using. It is amazing hardware, but it has become kind of throw away."

Closer to home, Quebecor CEO Pierre Karl Peladeau says heavy subsidies are why his company, whose Videotron subsidiary offers wireless service in Quebec and parts of Ontario, has thus far shied away from offering the iPhone. He cites research from rating agency Moody's that blames the inability of U.S. carriers to boost cash flow on heavy handset subsidies, and says his organization will remain on the iPhone sidelines "unless a more balanced business model prevails."

Long-term addiction

The challenge Rogers, Videotron and Canada's other carriers, large and small, face as they try to wean consumers off of their apparent addiction to cheap devices is one of habit. Subsidies have been a staple of the wireless buying cycle for so long that most customers don't remember having to shell out hundreds — or even thousands — of dollars for earlier-generation devices.

Those first cell phones — bulky, analog, voice-only units — remained luxury items as consumers shied away from high, unsubsidized retail pricing. Things changed in the early 1990s when carriers introduced subsidies and tied them to long-term contracts. Largely because of the significantly lower initial buy-in, more mainstream consumers flooded in and validated the model that's continued to fuel the market's growth ever since.

An attempt by Google to sell its first flagship, self-branded smartphone, the Nexus One, at full-retail price in 2010 ended in failure as customers simply shifted their attention to similarly-capable - and less expensive, at least initially — Android-powered devices from other vendors.

Google's experience underscores the impossibility of the task Rogers now faces: Unless every carrier simultaneously shifts every phone and every plan over to an unsubsidized pricing model, consumers will continue to seek the cheapest initial-purchase alternative. As they walk out of the store, shiny new bauble in-hand, the last thing on their mind is the three-year, multi-thousand-dollar commitment they've just made. As long as this psychology rules the market, nothing is going to change.

Carmi Levy is a London, Ont.-based independent technology analyst and journalist. The opinions expressed are his own. carmilevy@yahoo.ca