Telus Corp. is about to reduce wireless charges, giving customers relief from the industry's long-standing practice of tacking fees on top of monthly bills.
The move will effectively kill the dreaded system access fee, but it could force investors to rethink their bets on the telecom industry. That's because the fees are pure profits for the carriers, and a wave of new competition on the horizon is forcing them to remake their business models.
Beginning Nov. 5, Telus will offer wireless packages to all consumers and businesses without the monthly fees of $6.95 for "access" and $0.75 for 911 service. But the company will also boost the core cost of all its plans by $5 a month. As an example, Telus currently offers 100 minutes of talk time under a plan called "Your Choice 25." The core price is $25, but the additional fees raise the price to $32.70 a month before taxes. Under the new model, the 100-minute plan will cost $30, with no extra fees. In addition, Telus will offer voice mail service without charge.
The changes amount to a decrease in average revenue per user of as much as 8 per cent.
"It's very, very negative for the profitability of the whole industry," says Dvai Ghose, an analyst with Genuity Capital Markets.
Telus's move follows a similar decision this month by Rogers Communications Inc., the biggest wireless operator in the country. Rogers is lessening the impact of killing the system access fee by imposing a new "regulatory fee" that will range between $2.46 and $3.46 depending on the province.
BCE Inc.'s Bell Canada remains the holdout on system access fees, but Mr. Ghose says the charge will be dead by next year at the latest.
Neither Bell, Rogers nor Telus charge the fees on their discount flanker brands: Solo, Virgin Mobile, Fido and Koodo Mobile.
Several companies that plan to launch wireless networks in cities across Canada within the next several months have said they will not charge system access fees. In addition, they have promised simplified billing, doing away with the myriad of pricing plans that the incumbents throw at Canadians. Analysts also expect them to offer flat-rate monthly plans for voice and data, or even both.
The pricing changes under way in Canada represent a new paradigm for the domestic wireless industry, which has enjoyed fatter margins than those in most other countries. In the U.S., intense competition from upstart operators forced the three largest wireless companies to offer flat-rate packages a while ago.
Two leading U.S. regional challengers are MetroPCS Wireless Inc. of Richardson, Tex., and Leap Wireless International Inc. of San Diego, Calif., which offer flat-rate packages starting at just $30 (U.S.) a month.
In the last two years, the stock prices of the U.S. incumbents have dropped steadily and more steeply than the overall equity market. Shares of Verizon Communications Inc. have fallen 36 per cent, AT&T Inc. 38 per cent and Sprint Nextel Corp. 82 per cent (not including dividends).
Telus is down 42 per cent over the past two years, Rogers 37 per cent and BCE 38 per cent (not including dividends).
At Verizon, which runs the nation's largest wireless network as a joint venture with Vodafone Group PLC, gross margins are about 60 per cent of revenue and profit margins about 4 per cent. AT&T, the No. 2 wireless operator, has gross margins of about 58 per cent and a profit margin of about 10 per cent.
In comparison, Canada's big three boast gross margins in the range of 70 to 80 per cent and profit margins in the neighbourhood of between 8 and 16 per cent.
To maintain profitability at the levels they are use to, Canada's established wireless carriers will need to reduce their costs. The biggest issue they need to address is the subsidies they pay out on handsets, Mr. Ghose says.
"Until they eliminate or alleviate them, it is a very challenging situation."
Joseph Natale, executive vice-president and president of consumer solutions at Telus, would not comment on the company's plans for subsidies. But he said he expects to gain more customers and increase loyalty by reducing fees and simplifying monthly plans. There will be just five or six plans going forward for consumers and for businesses, replacing several dozen.
The industry must shift its focus away from average revenue per user to average margin per user and Telus believes its margins will remain "neutral" under the new pricing model, Mr. Natale said.
Two ways Telus plans to support margins is moving customers to electronic billing and bolstering its online customer support centre so that fewer subscribers need to contact a call centre, he said.
Telus Corp.
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SOURCE: THOMSON DATASTREAM