Phasing out of system access fees “good news” for Canadian cell phone users

The move by leading Canadian carriers to scrap system access fees for some of their cell phone brands is a sign the tide may be changing in this market in favour of the consumer.

Telus Corp. was the first major telco to scrap the fee when it launched the Koodo brand in March.

Now Rogers Communications Inc. is following suit – re-launching its Fido brand, minus the system access fee. The company is also offering lower rate plans and shorter-term contracts.

Industry insiders say these aren’t isolated initiatives, but are indicative of a trend – one that has been sparked by the prospect of increased competition in the Canadian wireless market.

The federal government’s wireless spectrum auction that concluded in July will open up the cell phone market long dominated by Rogers, Bell Mobility Inc. and Telus.

The auction essentially reserved for small players, 40 per cent of the 105 megahertz of airwaves up for sale. Globalive Communications Inc., a Toronto-based provider that sells home phone and Internet services under the Yak brand came out as the biggest winner.

The 30 licenses, across the country, which it purchased for $442 million, ideally positions the company to offer nation-wide cell phone service.
Experts say the increased competition sparked by this opening up of the market may force incumbents to offer cell phone users better deals so as to retain their business.

“Studies in the U.S. indicate that whenever a fourth or fifth player enters one of that country’s regional markets subscribers experience a substantial reduce in service fees,” said  Michael Janigan, executive director and general counsel for the Public Interest Advocacy Centre.
Another industry insider suggests the drivers behind Rogers’ scrapping of system access fees for Fido are not entirely clear.

“It’s like a chicken-and-egg question, because it raises the question: is Rogers responding to things like the launch of Koodo by Telus?” said Lawrence Surtees, vice-president and principal analyst, communications practice, at Toronto-based IDC Canada.  

In re-launching the Fido brand, Rogers came up with an owner’s guarantee that includes:

  • No system access and 911 fees;
  • A text alert when the customer reaches 75 per cent of their allotted minutes and another text alert when they reach 100 per cent to avoid an end-of-month surprise;
  • Choice of doing this with or without a contract (and the ability to change contracts during the term);
  • Inclusion of the Fido Rewards loyalty program, which was launched three years ago.

“We’re trying to hit the Christmas shopping season, even though this year may be a tough one with the economy,” said Sylvain Roy, senior vice-president and general manager with Fido. But on a macro level, 10 to 15 per cent of Canadians still don’t own a cell phone – and that slice of the market has different needs.

He said Rogers wants to reach of to this last segment through “more affordable and flexible pricing.” The company now offers plans that start at $15, with no extra fees, to reach these customers, Roy said.

Rogers was first to launch a pre-paid plan several years ago; Bell followed with its own discount plan called Solo. Then Rogers bought Microcell four years ago and kept the Fido brand alive as its pre-paid offering.

Telus didn’t come out with its own brand until Koodo.

“The two brands target different customers and take a different approach,” said Roy, adding that the new Fido plans target the “value seeker.” Rogers is trying to position Fido as a unique player (compared to Virgin or Koodo), since it’s been in the market for 12 years and already has an established customer base of 1.3 million.

Significantly, Bell also announced new rate plans last week, offering customers the ability to carry over unused minutes from one month to the next under three different types of plans.

Bell Canada spokesperson Julie Smithers said the Canadian wireless marketplace has become “incredibly competitive,” but added that Bell has no plans at this point to scrap the system access fee. “We’re always evaluating our options,” she said. “[But] at this time we’ll continue with the fee.”

Neither Rogers nor Bell commented on the controversy that’s erupted over the service access fee, which was introduced in 1985 when the federal government asked telcos to collect the money on behalf of the Minister of Industry.

In 1987, the government stopped collecting the fee, but the telcos continued charging consumers. Liberal MP David McGuinty is one high-profile crusader against the fee; he introduced Bill C-555 in the House of Commons to protest against it. If passed, it would require telcos to stop charging the fee and become more transparent in their billing.

In re-launching the Fido brand, it appears that Rogers will pre-empt any legislative action. Will other carriers follow suit? Surtees says this is quite possible.

Rogers picked up Microcell (and the Fido brand) four years ago because Microcell’s margins were getting clobbered, as were Bell’s and Telus’.

Surtees said the pre-paid (also called pay-as-you go) market has come a long way, since the scheme was first launched.

About a decade ago, there was a lot of hype and excitement around the pre-paid market as a way of growing the subscriber base and increasing penetration, and that really jump-started wireless voice penetration, he said.

But it didn’t take long before Rogers, Bell and Telus each discovered this expanded subscriber base was coming at the expense of profitability.

“There really is a difference in the revenue spend per subscriber and the quality of the subscriber between post- and pre-paid,” said Surtees.

He said when the telcos realized this, they didn’t take pre-paid away, but didn’t put tons of marketing effort into it either, because they recognized by aggressively promoting it they were actually hurting themselves – since the cost of acquiring the pre-paid customer was the same as acquiring the post-paid customer, but the amortization was much longer.

That is, until now.

“If I’m coming out of the gate as a newcomer with huge spectrum costs and network build costs, I’m not quite sure I’ve seen the math that’s going to yield a phenomenal payback by simply going after the consumer and the discount or pre-paid [market],” said Surtees.

“I still think there’s a much larger untapped potential in the business market – it is harder to get at, but if it were up to me, that’s where I’d want to have my sights set.”

With files from Nestor Arellano.

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