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George Cope, CEO of BCE Inc., meets with The Globe and Mail's editorial board on Aug. 15 2013.

The Globe and Mail

The introduction of new two-year cellphone contracts slowed subscriber growth for some of Canada's biggest carriers during the back-to-school season, a sign that consumers are spurning those higher-priced plans even before they become the industry standard in December.

BCE Inc. became the second incumbent to post weaker subscriber additions during the third-quarter, a key period that is second only to the holiday season for attracting new customers.

Much like larger rival Rogers Communications Inc., BCE put some of the blame on the transition to two-year contracts. Major carriers began revamping their two-year plans in July after the federal telecom regulator unveiled a new code of conduct that will effectively kill three-year contracts starting Dec. 2. Analysts agreed the new rules were likely a factor, in addition to a maturing market for smartphones.

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Canadians, who love subsidized smartphones but loathe long-term commitments, urged the Canadian Radio-television and Telecommunications Commission (CRTC) to ban three-year contracts during the public hearings earlier this year. Although the CRTC stopped short of a ban, the new code will allow consumers to cancel their contracts after two years without penalty. Major carriers had warned the move could lead to higher prices since smartphone subsidies would have to be amortized over a shorter term.

At any given time, there are roughly 10 million customers who are considered free agents – either because they are not locked into longer-term contracts or are using pay-as-you-go plans. But the carriers' quarterly results show that consumers, despite their disdain for three-year contracts, appear less than enthralled with the new two-year plans.

"In part, no doubt the move to two-year contracts did have some impact," said Siim Vanaselja, BCE's chief financial officer, in an interview. "Consumers need to understand two-year contracts versus three-year contracts and the new rate plans that were introduced."

BCE's Bell Canada division recorded net additions of 102,714 postpaid customers, which are top-end mobile users who pay their bills at the end of the month, during the July-to-September period. That is down 30.8 per cent on a year-over-year basis.

In addition to two-year contracts, executives said the slowdown was caused by a 10.6 per cent decrease in postpaid gross activations, fewer promotions, smaller discounts on smartphones and a shortage of certain devices. "There's also the new iPhone that came out. And I think that delayed some purchasing decisions," Mr. Vanaselja said.

Rogers, which reported its third-quarter results last month, added 64,000 net postpaid subscribers, 12,000 fewer than the year before.

Jeff Fan, an analyst with Scotia Capital Inc., said the CRTC's code seems to have slowed the growth of subscribers and smartphone penetration for the industry. "I would call it one of many 'unintended consequences' resulting from regulatory moves over the past summer," he said.

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Greg MacDonald of Macquarie Capital Markets Canada Ltd. said consumers held back during the third-quarter because they were reacting to the price increases. "An important additional dynamic is that you have a somewhat mature smartphone market with little in the way of wow factor in new phones, so industry demand is also declining," said Mr. MacDonald.

"As for the policy question – the government and consumer groups are counting on a decrease in smartphone prices so that contracts naturally disappear (the price increases are a function of the lower subsidy amortization period). They are right, this will happen and it will put downward pressure on prices as the margin pressure of subsidy lifts."

OpenMedia.ca, a consumer group that urged the CRTC to abolish three-year contracts, said the earnings should be a "warning shot" for incumbents about the need to offer more attractive rates. John Lawford, executive director of the Public Interest Advocacy Centre, said carriers have also sown confusion about the wireless code, which makes it "difficult for consumers to understand if they should wait to December to get the benefit of the Code, or go for a contract now."

Overall, BCE reported a third-quarter profit of $343-million that fell nearly 35 per cent from the same period last year due to a hefty regulatory charge related to its blockbuster acquisition of Astral Media Inc. Net earnings attributable to common shareholders amounted to 44 cents per common share compared to a profit of $527-million or 68 cents per share for the same period last year.

That year-over-year decline that was caused by the company's obligation to pay $230-million in "tangible benefits" (investments acquirers must make in the broadcast system) in order to purchase media company Astral – a deal that closed earlier this year.

On an adjusted basis, which excludes extraordinary items, its quarterly profit amounted to $584-million or 75 cents per share, up from year-ago $546-million or 70 cents.

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BCE owns a 15-per-cent stake in The Globe and Mail.

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