Consumers can expect to pay more for their smartphones in the future, as Canada's largest telecommunications companies try to wean customers off the expensive subsidies they've grown accustomed to receiving in exchange for a locked-in contract.
Rogers Communications Inc. chief executive officer Nadir Mohamed said the company is looking at ways of reducing the amount of money it spends getting smartphones into the hands of customers who don't use a lot of data.
It's a critical issue for the companies, because the subsidies are intended to ensure customers spend the next three years consuming (and paying for) vast amounts of data on the devices. Rogers customers can get a $650 iPhone 4s for $159, for example, providing they sign a three-year contract.
But as smartphones work their way into the broader population – about 60 per cent of the company's customers now use a smartphone such as an iPhone or BlackBerry – they are finding their way into the hands of customers who aren't interested in browsing the Internet or checking their stock portfolio.
U.S. provider Sprint Inc. , which reported earnings for the first time in February since adding the iPhone to its stable of devices, said that while it sold 1.8 million phones in just three months it spent $1.7-billion subsidizing the devices to get them into the hands of consumers.
At Rogers, lighter use of the phones among new subscribers is showing up in the company's profits. Its average revenue per user – a key metric in the cellular industry – decreased by 2.26 per cent from a year ago to $57.65.
"Service providers will start targeting different parts of the market to factor in the usage patterns of a particular customer," Mr. Mohamed said at his company's annual general meeting in Toronto.
Mr. Mohamed said Rogers is the first in Canada to tackle the subsidy issue, because of its position as the industry's market leader. He said when smartphones first came to market, it was essentially a choice between a BlackBerry and an iPhone, and customers expected subsidies in exchange for their heavy use.
But with a host of new competitors offering lower-cost products – such as Sony, HTC and Samsung – Mr. Mohamed said the companies will be able to better match phones with customers. As they become heavier users, he said, the companies would be able to steer them toward higher-end products and richer data plans.
"People want to start out with smaller buckets of data as a way to get into the category," he said. "This business hasn't used segmentation, which is a standard piece of business in other parts [of our business] You will see that going forward as we start targeting different segments."
The subject was also brought up by a shareholder at the company's AGM, who asked why the company continued to help pay for phones that consumers are lining up to get their hands on. The man, who wouldn't provide his name, pointed to Apple Inc. 's $11.6-billion (U.S.) profit in its most recent quarter as a sign that customers are willing to pay more.
Quebecor Inc. CEO Pierre Karl Peladeau said recently that while the company "would welcome" the addition of Apple products to its line of phones, he's "becoming increasingly concerned about the unfavourable economics resulting from the high cost of subsidizing the iPhone."
He pointed to a Moody's study that found large U.S. carriers have been unable to generate increased cash flow in their most recent quarter despite record iPhone sales because of the heavy subsidies they were forced to provide.
"Needless to say, we have become more cautious at getting the iconic device unless a more balanced business model prevails," he said.