Ranting about Regulatory Changes

I recently read about the changes that will be made to the cell phone industry in Canada -- notably limiting contract lengths to two years. On the whole I think this is a good thing. For the last two phones purchased, I debated long and hard about whether to sign a lengthy contract to receive a cheaper phone or not. In the first case, I only signed a year-long contract for a small discount on my phone because I wasn't sure what my life situation would be like in three years.

Then in the holiday season of 2010, I purchased my current phone and signed a three year contract. At this point, my phone is showing its age, and I'm definitely thinking about a new one. The big difference between me and the folks who advocated to regulatory change is that I do not feel entitled to a new one. Many of the complaints about the cell phone industry in Canada revolve around the argument that consumers are stuck in their contracts and left with "obsolete" phones by the ends of their contract. This argument is patently ridiculous.

First, a three year old phone is not obsolete. It may not be cutting edge, but the iPhone 4 (released nearly 3 years ago) still runs almost every app offered on Apple's App Store. It still receives updates to iOS, and is even more functional (wonky Maps app aside) than it was when it was first released. I'd say those abilities define a device that is not obsolete.

Second, nobody held a gun to consumers' heads. Nobody was ever forced to sign a three year cell contract. The subsidized cell phones out there are an *incentive*, not a God-given right. There was nothing stopping people from buying phones outright, buying inexpensive phones, or perhaps not throwing out their phones every two to three years just to trade up to the newest flagship phone.

Finally, do consumers not realize what will happen as a result of these changes? The price of subsidized phones will increase -- a lot. If Telus, Rogers, or Bell can no longer spread the cost of that subsidy over three years, they'll either cut the subsidy or raise the required monthly plan minimum over two years to compensate. The era of paying only $50 a month for three years and less than $200 for a flagship phone will end. I think there are already signs that this will happen.

If one of the major cell providers, say Telus, had changed things so consumers only had to sign a two year contract to receive a top-of-the-line subsidized phone, wouldn't they have annhilated the competition? Even if the competition matched their terms, the immediate boost to subscribers would be enormous. Because they haven't done it, I have to assume that they cannot afford to. If a customer signd up for the minimum $50 monthly plan to receive a phone whose price was subsidized by $500, Telus would be earning $1200 over two years and essentially giving the consumer $500. That's a gross profit of $700 -- $350 per year -- less than $30 per month. The same subsidy and subscription over three years would give a gross profit of $1300 over three years -- $433 per year -- roughly $36 per month. In other words, their profit per person would drop by one-sixth. Their subscriber base would have to increase by roughly seventeen percent just to even out at their current level of profits, and that's assuming that they wouldn't need to upgrade their network to handle all of that extra traffic.

Anyway, I'm in favour of shortening the contracts because it'll hopefully prevent people from being stuck in a lousy situation should they drop and break their new phone shortly after entering a three year deal. I just don't expect any tangible benefits to consumers beyond that.