Surprise! (Now Pay Up)

One of the first things people ask me when we’re talking about wireless services in Canada is this: why should we care how much cell phones cost? Aren’t they a luxury? Well, the way we’re using our cell phones these days suggests otherwise – more and more Canadians are ditching their landlines every day in favour of going wireless. Since so many people depend on wireless services in their daily lives, I would say it’s only natural that we should be concerned with their cost – all the more so considering communication spending is among the 7 largest expenses facing Canadian households.

During a recent interview, I was caught off guard when asked: “It sounds like you think cell phones are just for the rich. Is that true?” “Absolutely not,” I responded, “mobile phones might not be for everyone, but everyone should be able to make that choice for themselves, and the first part of making that choice depends on whether or not you can afford service.”

There are some who will say that prices in Canada aren’t that high, and consumers just need to shop around. But it’s not that simple. It seems like every other day there’s a new report on wireless prices. These reports tend to have a few things in common – first, they usually make use of the same primary data, yet often come to opposite conclusions. (See here and here.) I can only speculate on the reasons for these incongruities. It can be hard to tell who to trust – especially since, if you’re reading about it in the paper, you’re probably getting third-hand information.

The second and perhaps more important thing they have in common is this: none of them factor in surprise costs. Flashy advertising and promotional pricing might make it seem like there are deals to be had, but “bill shock” is so common that virtually everyone you meet has got a horror story waiting to be told. Who among us hasn’t opened their phone bill to discover that they’re being charged way more than what it says in their contract?

I’m surprised I haven’t seen a report linking “overage charges” to baldness, because I can’t be the only one who pulls my hair out when I’m hit with an unexpectedly high bill. Yet overage charges are a universal part of phone contracts. The industry sometimes refers to these fees as “cream” – they cost next to nothing to produce, and can be easily skimmed off the top for bonus revenue. Although national carriers have recently moved to eliminate long distance and texting fees on some of their plans – due not to the threat of Verizon but to the CRTC’s Wireless Code – we all pay dearly if we use “too much” data, or if we even dare step foot into the United States (Not to mention live close enough to the border to accidentally roam onto an American tower).

These days when you “overuse” your car, you pay about $1.40/L for a fill up. If you “overuse” a Rogers phone, you can pay up to $5/100MB for more data! Does streaming a Youtube video over homegrown Canadian spectrum actually cost producers more than a litre of good ol’ Texas tea? I sincerely doubt it.

High prices at the pump might be a bit of a shock, but they’re not a surprise. If you’ve been driving for any amount of time, chances are you know how far you need to go, you’ve got a rough idea of gas prices, and you can at least ballpark your car’s gas mileage. But if you have no idea how much it costs to send a BBM, to check the weather or to listen to streaming radio on your phone, you’re not alone. I’ll be the first to admit that I have no idea how much data a two minute news clip takes up.

Some might say that consumers just need to be better informed, but who’s got time to study rocket science? Most Canadians are simply too busy earning a living to pursue the legal and engineering credentials required to understand the minute details that make up contracts and monthly bills. This fact of life doesn’t stop the phone companies from charging for overuse, however. From ever-changing technologies (my iPhone 4 16GB gets 3G HSPA+ service, sometimes it kicks down to GSM EDGE, or if I find a hot spot it switches to 802.11b/g/n Wi-Fi) to the hundreds of pages of small print you have to read to sign up for service, it actually seems like they’re counting on keeping their customers in the dark.

Case in point: the screen on my neighbour’s brand new iPhone 5 recently broke – dropped on pavement. She, being an informed consumer, had thought ahead and purchased both a case (which proved ineffective) and handset insurance when she signed her contract. Imagine her surprise when she was told that she would have to pay a $200 deductible to replace her insured phone! (That’s on top of the $179 she paid upon signing.) She couldn’t afford to pay the deductible or the roughly $500 needed to buy out her contract (having paid that much to get out of her previous contract just months before), so she really only had two options: risk a glass shard to the finger or stop using the shattered phone altogether. Neither one of these is an economic choice: in either case, she has to continue paying her monthly bill until her contract expires. The only thing she can really do is file a formal complaint.

According to the Commissioner for Complaints for Telecommunication Services, from 2011-2012 15% of all complaints over billing issues were about premium text messaging charges and data and bandwidth charges. A further 27.3% were about billing errors regarding a customer’s monthly plan, which has to include issues with the incumbent’s endemic inability to accurately measure their customers’ data usage. (See also here.) So between 15 to 42.3% of complaints filed by people who actually took the time to file a formal complaint about their bills resulted from getting a big surprise at the end of the month.

Further, 34.7% of all complaints about service delivery issues were regarding intermittent service. Apparently there’s no discount for dropped calls or spending time with no bars on your phone.

Canadians aren’t taking these issues lying down, but filing formal complaints and spending time arguing with outsourced customer service reps will only take you so far. Surprise charges continue to hit Canadians where it hurts the most – our wallets.

While the wealthy may be able to absorb surprise costs with relative ease, the evidence shows that many Canadians cannot. The CRTC’s most recent yearly data report (released 2012, data for 2010) shows evidence that, while 95% of Canadians earning over $100K per year subscribe to wireless services, that number drops precipitously with income, with only 55% of those earning $27K or less per year able to afford service. The “digital divide” disproportionately affects low income earners, and is reflected in the fact that of OECD countries measured, Canada ranks dead last in terms of total wireless subscribers per capita.

Lower income Canadians can easily be caught in a vicious circle, whereby they require a means of communication to acquire work, yet they cannot afford to purchase the services they need without it. It stands to reason that someone waiting for a call after a job interview needs a mobile phone every bit as much if not more than someone calling to charter a flight.

Yesterday, BMO released the results of its “Rainy Day survey,” which reveal that

“Sixty-eight per cent of Canadians surveyed have had to dip into their rainy day fund in emergency situations but the majority of them – 58 per cent – didn’t have sufficient cash to cover the full cost of the expenses.”

The report suggests that “cutting back on non-essential spending – such as buying coffee or lunch at work – is one way to gather extra funds to contribute to your rainy day fund.”

Guess what doesn’t count as “non-essential spending?” Cell phones. In a 1988 report produced for the Fraser Institute, Business Professor Steven Globerman said of rates for residential landlines: “the evidence is persuasive that access will be relatively unaffected by higher flat-rates for local service since demand for access is extremely price inelastic.” [emphasis mine][1]

“Extremely price inelastic” is economic jargon that means people will keep paying for something, even if it becomes more expensive, until the point at which they can no longer afford it. Globerman (also the author of a new Fraser Institute report calling for the government to fully remove foreign ownership restrictions on Canadian telecommunications) was talking at the time about the introduction of competition in long distance services in the 90’s. He predicted it would lead incumbents to start charging higher rates for residential subscribers, which it did.

Aside from the fact that there is plenty of evidence that shows a clear trend toward Canadians substituting mobile phones for landlines, earlier this summer the CWTA kindly brought Globerman’s argument into the wireless 21st century. Based on the premise that wireless services are price inelastic, their report came to the outrageous conclusion that Canadians are getting a good deal on wireless services since we’d be willing to keep paying if prices went up!

BMO’s Rainy Day report really turns this argument on its head. The majority of Canadians surveyed are incapable of fully covering unexpected expenses, which for many include roaming and data charges. Incurring these types of charges is virtually inescapable, even for the most informed consumers. But what can you do about it?

As I’ve said, you can file a complaint, but the CCTS doesn’t have the power to take concrete action. Some claim that the market is already “hyper competitive” and that you should just “vote with your wallet,” but in a highly concentrated industry, there is little real choice for Canadian consumers.

Earlier this summer, Bell CEO George Cope said: “Quite frankly, our product is our network.” If that’s the case, then many Canadians really only have two products to choose from (if that), since Bell and Telus share a network and Rogers shares with regional providers. Three providers (plus regional companies) who share their infrastructure is a far cry from the type of competition that would be needed to bring down prices for consumers.

The real power to effect change lies with two parties: the federal government and industry. The incumbents have spent a bundle this summer making it abundantly clear that they’re not interested in making changes, so it looks like it’s up to the government to do something about it.

The Conservative government for its part has done a very good job of identifying the problem: “Canadians want more choice, better service and lower prices.” However, their approach to a solution – promoting competition – just hit a major roadblock.

On Monday, Verizon’s CEO Lowell McAdam announced that his company won’t be coming north after all, and that they never really intended to. Even if Verizon had been serious, their Canadian customers’ bills would have still been full of surprises – but that’s another story. This development has cast serious doubt on whether the government’s plan to bring meaningful competition to the Canadian wireless marketplace will come to fruition, or indeed whether it was the right tool for the job in the first place. For the time being, we’ll have to wait to see who shows up to announce their intention to bid on September 17.

Some are still holding out hope that foreign competition will arrive soon. Industry Minister James Moore has indicated that his department plans to forge ahead with their plan “to provide more choice and more competition for Canadian consumers.” But in light of recent events, some observers are calling for the government to “take a deep breath” and reexamine their approach.

Perhaps it’s time that Industry Canada step back and consider that there are plenty of viable alternatives for promoting choice and competition, ones that don’t have to rely on industry-led initiatives and selling resources to the highest bidder. I hope the government decides to stand by their pledge to put consumers first, whatever the outcome of the 700MHZ auction. That would be a pleasant surprise.

That’s all for now.

[1] Globerman, Steven with Carter, Deborah. Telecommunications in Canada: An Analysis of Outlook and Trends. The Fraser Institute, Vancouver, B.C. 1988. p 113. See also p 112-113:

“The rebalancing of prices, in turn, has raised concerns about “adverse” redistribution effects; i.e., the costs of a relatively small number of businesses will decline, while the costs of a relatively large number of residential subscribers will increase. It has also raised a concern that certain residential subscribers will be forced “off-the-network” by higher access charges.”

I have to take issue with the use of scare quotes around “adverse” and “off-the-network.”

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One comment

  1. Reblogged this on The Emporium of Lost Thoughts and commented:
    A good discussion on how a mobile phone/smart phone is becoming a necessity and how this puts consumers at the mercy of extra charges from roaming and data overages.

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