CRTC’s wireless code of conduct may boost cellphone bills

Two-year cellphone contracts will soon be the norm in Canada, as opposed to three years currently. Woohoo, right? Well, maybe. As I've warned elsewhere, the shift is likely going to result in prices going up. Carriers and their industry group have said as much.

So what will that actually mean, dollar-wise? We won't know for sure until the carriers re-orient their pricing to reflect the CRTC's new Wireless Code of Conduct, which kicks in Dec. 2, but now is as good an opportunity as any to have some fun with numbers. Here is some back-of-the-envelope math to get an idea of what things might look like six months from now.

Perhaps the best way to arrive at any guesses is to take the basic version of the most popular phone in the land, the iPhone 5, on the biggest carrier, Rogers. The basic model currently costs $179 on a three-year contract, while the device's full suggested retail price is $699. That means the subsidy customers are currently getting amounts to about $519, or $14 a month.

Over a shorter period of 24 months, that subsidy is more like $21 a month. Assuming Rogers isn't just going to eat that extra $7 of subsidy, it's either going to have to be tacked on to the customer's monthly bill or added to the upfront cost of the phone.

Currently, Rogers' minimum monthly plan, which offers 1,000 minutes and a measly 150 megabytes of data, costs $50. Adding the extra subsidy to that would mean $57. Alternatively, the monthly fees could be kept the same, in which case the upfront cost of the phone would go up to $347.

How would this compare to other jurisdictions? In the United States, the same iPhone 5 has an upfront cost of $199 on AT&T, with a basic monthly plan offering 900 minutes and 300 MB of data for $70. All told, the total minimum cost of owning the device for two years is $1,879. In the potential scenario above, the total cost over the same time frame would be considerably less on Rogers, at $1,547.

But the actual substance of those monthly plans must also be considered. Rogers' 150 MB is far too little for just about any iPhone user, which means the next-cheapest plan - $60 for 500 MB - is the more realistic comparison. That brings the total cost of ownership over two years up to $1,787, or much closer to AT&T.

The real fun comes in comparing with other countries. Wireless industry proponents usually cite Canada's smaller size as a reason for why things must necessarily be more expensive here. Yet taking a look at smaller countries such as Ireland reveals that to be a red herring.

An iPhone 5 on Vodafone Ireland costs a whopping $916 (Canadian) upfront, or $268 on a two-year contract. The minimum monthly plan, which consists of 500 MB, 100 general minutes and unlimited talk to other Vodafone users, costs $47, making its total two-year cost of ownership $1,396. Sure, customers get fewer minutes on the surface of it, but free incoming calls and texting obviates some of that.

So how is it that an iPhone costs so much less in a country with one fifth the population of Canada and less than 2 per cent of the U.S.? There are two possible answers to that, with the first being that Vodafone is a global giant that can itself bring economies of scale to bear. If that's true, it really makes the case for getting rid of Canada's antiquated foreign ownership laws, which prevent such large multinationals from coming here and acquiring the likes of Bell and Rogers.

The second, more likely answer is that carriers in Canada and the United States, despite that country's massive economies of scale, are just simply extracting more from their customers. Indeed, according to Bank of America Merrill Lynch's Global Wireless Matrix, North American carriers are pulling in 16 per cent more revenue per user than the developed world average.

There are a couple of other things to consider amid all this speculation, such as what kinds of volume discounts carriers in various countries get on phones from manufacturers. In many cases, carriers don't pay the full retail price like the general consumer does, which naturally affects the subsidies they can dole out. But the iPhone is a good yardstick to base such guesses on because, according to most accounts, Apple doesn't give carriers very big discounts, if any.

The other thing to keep in mind is what I wrote about yesterday - subsidy amounts are bound to start heading downward as different competitive pressures finally bring technological realities to smartphones, leading to cheaper devices overall. If I were a betting man, I'd wager there's no way that the next iPhone - which will certainly hit the market before the CRTC's wireless code - will be $700 or higher. With any luck, that could counter the almost-certain price hikes that the new rules will usher in.