As the cost of high-end cellphones continues to rise, so too does the cost of fraud for the wireless carriers who subsidize and sell them to customers on lengthy contracts.
In North America, and particularly in Canada, big wireless providers subsidize the cost of devices such as Apple Inc.'s AAPL-Q iPhone to lure customers. In exchange, the company locks subscribers into long-term contracts to ensure a profit. The new 32-gigabyte iPhone 3GS, for example, sells at Telus Corp. T-T for $799 “at-cost” and only $299 with a three-year contract.
But some people have discovered a loophole to cheat the system. Using fake identification, and somehow tricking background credit checks by companies, fraudsters are buying the phones at the discounted rate and then disappearing – dodging the monthly bills designed to recoup the carriers' costly subsidy. And as Canadians increasingly move toward expensive smart phones, the cost to carriers is increasing, an analyst said.
Carriers are reluctant to discuss the problem in detail, but they acknowledge it exists.
“This is still fairly new,” Telus spokesman Shawn Hall said. “People can come in with a fake ID, buy a handset, ship it overseas – we understand they're probably going to Asia – and reselling them.”
Mr. Hall said the scam “is certainly an issue” for Telus, but added there are dozens of scams that hit the company without significantly affecting its business operations. Other carriers, including Rogers Communications Inc. RCI.B-T and BCE Inc.'s BCE-T Bell Canada, also said there were cases of fraud, but that these were isolated.
“We have indeed encountered this issue since we launched the device back in November,” Bell spokesperson Claire Fiset said, adding that the company is working within the industry and with law enforcement.
Since these companies feel the matter is likely not significant enough to concern shareholders, there would be no disclosure of theft and fraud figures, said Carmi Levy, an independent technology analyst.
But the matter “is not insignificant,” Mr. Levy said. “The carrier loses twice; lose on the hardware, lose on the contract.”
And as carriers compete to subsidize increasingly expensive smart phones, such as the BlackBerry Bold 9700 or the newest iPhone, the costs of fraud increase in lock-step.
“The greater the spread between the subsidized cost and the actual cost of the device, the greater the potential profit to the criminal – and the greater the cost to the carrier,” Mr. Levy said, noting carriers are reluctant to discuss the issue for fear of inadvertently providing a “how-to guide.”
For Telus, which also operates the discount Koodo brand, most customers have chosen a subsidized phone – the most popular contract is three years in length. But recently, there has been a shift in focus away from contracts, since subscribers often have to pay a hefty “early cancellation fee” to break out.
Some new providers, such as Globalive Wireless Management Corp., are selling phone service without subsidies or contracts and some mainstream phones are now being sold untethered to wireless carriers, such as Google Inc.'s GOOG-T Nexus One phone.
Globalive, which operates under the Wind Mobile brand, sells phones at-cost without contracts and has marketed itself as an alternative. But Wind, which makes money from the service it provides and not on handsets, seems to be selling more of its BlackBerry Bold 9700s than are being activated. The company, which sells the units cheaper than any of the incumbent providers, has speculated that these are being sold on eBay.
“We were thinking that this was happening, because we had seen a larger number of BlackBerrys sold than BlackBerrys activated,” said Romeo Ganescu, director of marketing for products, services, and terminals for Wind, who noted customers can wait before they activate a phone. “But I don't think we've identified the issue as pressing, or as a fraud.”
