Take the Free Sh*t: You’re Paying for it Anyway

It was an accident. Or so you told yourself as your faded iPhone 3GS crashed to the pavement from your weak, weak grip. Deep down inside, you know that your grip on that phone has been a little loose ever since you “qualified for an upgrade” with your wireless carrier. Canadians wait with bated breath for that special date every two years or so, when their wireless service provider offers an upgrade to the shiniest new device that promises to get you more connected at faster speeds in higher resolution than ever before – all for the measly price of maybe a hundred bucks…. and your sole, otherwise known as the three year contract. Six months later, when Apple smites you with a neven newer model, the cursing begins. Which of your children you wouldn’t give then to cut the three-year chains that define your life of servitude to Big Telecom so you could get your hands on the iPhone 5GS.

The Canadian Radio-television and Telecommunications Commission (CRTC) recently held a public hearing on the establishment of a mandatory code of conduct for wireless service providers. At the heart of public disdain for their wireless overlords is the wretched, universally despised three year service contract, which seems to be the hallmark of Canadian wireless carriers. Although I have limited sympathy for Canadian wireless carriers, I concur with them on one point: the three year contract, itself, is not an evil beast: it’s a purely voluntary election that people enter into freely. You can’t fault carriers if consumers choose a bad bargain. The real issue is that Canadian consumers must choose between a bad bargain and a worse bargain, where the only rational choice is to take the free sh*t.

At the advent of cellular service, Canadian (and U.S.) carriers, decided that, in order to get more people hooked on using their services, they would essentially finance the capital cost of handsets for new customers. Carriers ensured they recovered the cost of the handsets by locking those customers into long-term service contracts at minimum rates. Customers really seemed to like the idea of a “free phone” up front, and they needed a carrier for their shiny new phones anyway: it was a win-win. Then, newer, shinier faster phones that connected you better at higher speeds in greater resolution than ever before started showing-up more frequently – almost annually. But customers and their phones were locked to their current carriers under iron-clad contracts buffered by digital locks on phones. In response to customers’ unfulfilled desire for shiny things, carriers ingeniousely introduced the mid-contract “upgrade” – get the new device that gets you better connected at higher speeds in greater resolution than ever before for a couple hundred bucks… plus another three year contract. And the cycle continued, mostly because people like shiny thing.

The problem with the Canadian wireless system is not the length of service contracts. The problem is that, somehow, the financing of phones got tied-into the wireless service rates. When a person takes a cheap phone on promotion with a three year contract, there is no financing charge on each monthly statement – the cost recovery of the phone is simply tied into the overall service rates. As a result, wireless rates don’t reflect the actual cost of wireless service: they reflect the cost of wireless service and the cost of a new phone. If I show up at any Canadian carrier with my rickety, unlocked iPhone 3GS that I’ve already paid for, the carrier will charge me the same rates as the sucker who took their free phone deal, even though my phone is already paid for. Thus, I wind-up financing other people’s phones by paying the same inflated rates as all the free-phone-takers. As a result, the real suckers in Canada are people who don’t take the “free phone” deals offered by carriers, because we’re all paying for a phone anyway!

When cellular phones were first introduced, it seemed intuitive (or at least, not strange) that the wireless carriers also sold the hardware that worked on their networks. You might recall that the land-line telephone system initially required you to rent or purchase your phone from the service provider. Regulators eventually forced carriers to permit the connection of “third party devices” (ie. a telephone from Radio Shack) to the land-line systems. The availability, selection and price-points of landline phones flourished and telecom providers had to beuild their businesses based on providing service, not financing hardware. Does anyone enter into a three-year landline contract with Bell? In fact, does anyone still get a landline?

Today, you would likely find it absurd if the telephone company sold you a telephone, your internet provider sold you a computer, or your television provider sold you your television. Do you think Shaw owes you a television for free because you subscribe to its services?

The current wireless system is akin to Shell providing you a new Cadillac for $4,000.00, provided you buy gas exclusively from Shell for three years at pre-established minimum rates (which might be a little, or a lot higher than you would expect to pay for gas otherwise), with significant penalties for early termination. Also, your Caddy won’t run on Petro-Canada, Esso or any other gas you might like to try. If it breaks, you’ll need to keep buying Shell gas anyway, and we’ll offer you a replacement Caddy at the fair market price of $40,000.00… unless you qualify for an upgrade Caddy for only $6,000.00 and another three year contract tacked-on to your old one (you’ll be buying Shell for your natural born life) . It seems kind of stupid….although I might be onto something here (process patent pending, Shell).

The simple solution to this whole fiasco is not to ban three year contracts – banning things is the timeless solution of the idiot. Instead, CRTC should mandate that carriers must separate phone financing costs from actual wireless service costs for customers. Then, if I choose to buy the newest Android straight from Google, I know I will actually be paying for wireless services, not phone financing, when I go to a carrier for service. If someone wants a “free phone” from his carrier, that’s fine, but call it what it is – financing – and charge him for it accordingly, and separate from the actual provision of service. The carriers have trained North Americans to believe that new cell phones cost $100.00, instead of the actual $500.00 to $900.00 price tag. And we’ve sacrificed mobility between carriers and fair service rates for the “good deal”. It’s not that we’re all stupid, but that the only rational economic choice is to take the free phone, because you have no choice but to pay for it through inflated rates anyway.

Permitting carriers to support the “free phone giveaway” by hiding the capital costs in their wireless rates ensures everyone will be hooked on the three-year contract cycle like a bad drug. I’d like to get off the crack and would be happy to pay at least a few hundred dollars up front for my phone if I knew I could switch carriers at any point without penalty, and that the service rates I was getting weren’t inflated to pay for everyone’s shiny new phone. Forcing carriers to segregate phone financing rates from service rates is the simple solution that provides consumers with real choice respecting phone purchases and service providers. I think I’d hold onto my old iPhone 4 a little tighter in that world.