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Intervention to the CRTC on device financing plans

This intervention is related to Telecom notice of consultation CRTC 2019-309

October 15, 2019

On this page

  1. Introduction
  2. Executive Summary
  3. An Overview of Device Financing Plans
  4. Affordability and Pricing Mechanisms in the Canadian Wireless Industry
  5. New Device Financing Plans Increase Consumer Switching Costs

I. Introduction

  1. Pursuant to section 125 of the Competition Act, the Commissioner of Competition ("Commissioner") wishes to intervene in this proceeding.
  2. The Commissioner submits this intervention of the Competition Bureau ("Bureau") in response to Telecom Notice of Consultation CRTC 2019-309 ("Notice of Consultation"), published by the Canadian Radio-television and Telecommunications Commission ("CRTC") on August 30, 2019.Footnote 1
  3. This proceeding raises important issues for competition in the Canadian wireless industry. In the Notice of Consultation, the CRTC poses a number of detailed questions about the applicability of the Wireless CodeFootnote 2 to new wireless device financing plans introduced in the summer of 2019. Given that these questions mainly involve legal interpretation, the Bureau does not directly answer them in this submission. Rather, the Bureau's intervention centers on two competition-related matters that the CRTC should consider when making a determination.

II. Executive Summary

  1. During the summer of 2019, some wireless service providers introduced 36-month device financing plans into the Canadian wireless marketplace. These new plans have been hailed by some as increasing consumer affordability and generally being pro-consumer. But a closer look reveals that they may not, in fact, achieve those goals.
  2. All else being the same, longer financing terms can result in lower monthly device costs for Canadian wireless consumers. However, in this case, all else is not the same. At the same time that these new device financing plans were introduced, service providers reduced device subsidies, which spiked the total price of new wireless devices by more than 40%.Footnote 3 In the very least, this diminishes any affordability improvements that flow from longer-term device financing plans.
  3. Additionally, longer financing terms can make it significantly more challenging for consumers to switch providers. While these plans can make monthly device costs lower, lower monthly payments mean that outstanding device balances are higher in every month of the financing plan. Since consumers must pay the outstanding device balance before they can leave their current provider, higher outstanding balances make it more costly for a consumer to switch to a competitor. This acts against a vibrantly competitive wireless marketplace, by making it harder for competitive providers to attract customers.
  4. This is a pivotal time in the Canadian wireless industry. Smaller facilities-based competitors are expanding their competitive presence, and other CRTC proceedings are focused on improving wireless service competition in Canada. If new competition develops, but consumers must pay hundreds of dollars in order to switch, how will those consumers take advantage of the lower prices, greater choice, and increased levels of innovation that are characteristic of greater competition?

III. An Overview of Device Financing Plans

  1. To better understand and analyze the new device financing plans at issue in this proceeding, it is necessary to understand how they work, and how they differ from prior plans in the Canadian wireless marketplace.
  2. Consumers have three choices when it comes to purchasing a wireless device:
    1. use an existing device that they own;
    2. purchase a device outright (either through a service provider, a device manufacturer, or a third party); or
    3. finance a portion of the device cost.
  3. Modern wireless devices are expensive. In this proceeding, several service providers have stated that a modern iPhone is typically priced at around $2,000.Footnote 4 At these prices, it may be beyond the reach of many consumers to simply buy such a device outright.
  4. This means that those consumers must resort to some sort of financing when purchasing a device. There are a range of financing options available to consumers, like with any other significant purchase. But seemingly the most popular way that consumers finance devices is through a wireless service provider.Footnote 5
  5. Wireless service providers have offered device financing arrangements for many years. A popular modern example are "Tab" plans, where a consumer chooses to finance some or all of their device cost through a fixed term (typically two years) of equal monthly payments.Footnote 6 Under these plans, in addition to normal monthly payments, consumers generally have the ability to pay off some or all of their outstanding tab balance at any time.
  6. During the summer of 2019, some wireless service providers introduced a new type of device financing plan.Footnote 7 Under these arrangements, the consumer choice remains the same – they can continue to bring their own device or purchase a device outright, or they can finance some or all of the device cost. This arrangement is similar to the tab scheme set out above – the consumer pays off an initial device balance in equal monthly payments over a period of time.Footnote 8
  7. From a consumer perspective, the only thing that seems different between tab plans and the new device financing plans is that these new device financing contracts can have a different (longer) term than the underlying wireless service agreement.

IV. Affordability and Pricing Mechanisms in the Canadian Wireless Industry

  1. The purported benefit of these new device financing plans is that they aid consumer affordability by reducing the monthly financing charge that consumers pay to obtain a modern device.Footnote 9 And it is true that the simple arithmetic says that spreading a given device cost across a greater number of months will result in lower per-month payments. However, the totality of pricing changes associated with the summer 2019 device financing plans is more complicated.
  2. In particular, at the same time that new device financing plans were introduced, service providers generally reduced subsidy amounts, thereby increasing the total device price that a consumer must pay over the length of their relationship with that carrier.Footnote 10 The net effect of these changes is that, while consumers may pay a lower per-month device financing fee, they may very well be paying a higher overall price for their devices.
  3. Accordingly, the CRTC should be careful in concluding that longer device financing contracts are of overall benefit to Canadian consumers. Lower monthly device financing payments have their benefits, but these benefits must not outweigh other policy goals, including the continuing development of effective competition in the wireless sector.

Longer Financing Plans Can Aid Affordability …

  1. Longer financing terms, all else being the same, can result in lower per-month device prices for consumers. This is because, when a sum of money is paid back over a greater number of payments, the per-payment cost is lower.Footnote 11
  2. At any given monthly payment amount, longer financing periods can allow consumers to obtain more expensive devices. Alternatively, longer financing periods can allow consumers to pay off the purchase of any given device in smaller monthly payments. Both of these effects have been referred to as increasing affordability in this proceeding.Footnote 12
  3. Affordability is important. Lower prices generally result in greater consumer adoption of wireless technologies. Greater wireless adoption, and more intensive wireless usage, can have significant benefits for Canadians and the Canadian economy.

… But Longer Financing Plans Will not Always Aid Affordability

  1. However, it is not true that longer financing terms will always result in more affordable devices for consumers.
  2. In setting a monthly device price, a service provider has the choice of three strategic variables:
    1. the retail price of the device;
    2. the amount of any subsidy (discount) from that retail price; and
    3. the number of monthly payments that a consumer must make.Footnote 13 These variables are expressed in the formula below:

      Monthly Device Price = Device Retail Price Subsidy Amount
      Number of Monthly Payments
  3. There are situations where, by manipulating the device retail price and/or subsidy amount, a consumer may face the same monthly device price under a 36-month financing contract as under a 24-month contract.Footnote 14
  4. For example, in the situation where a $2,000 device is subsidized $800 in a 24-month plan, the monthly device payment on that plan would be $50. If, after introducing a 36-month plan, that device subsidy falls to $200, then consumer will still pay the same $50 per month.
  5. By extending device financing periods while simultaneously manipulating the subsidy amount, consumers will not necessarily obtain devices that are more affordable. In the example above, for instance, the service provider receives $1800 in device payments from the consumer under the 36-month financing plan, rather than $1200 under the 24-month plan.Footnote 15
  6. This is not a theoretical concern. Shortly after these plans were introduced, a National Post article, citing an industry financial analyst, recognized this possibility:

    "The move [to 36-month device financing contracts] could reduce the amount carriers pay to subsidize each device, the cost of which was previously baked into monthly service plans."Footnote 16
  7. A Globe and Mail article similarly recognized the benefits to service providers associated with decreased subsidies under longer-term device financing plans:

    "Bay Street analysts have said the $0-down financing option could actually save Canadian carriers money, based on estimates that the companies pay about $400 to $500 on average for devices under the subsidy model and expectations that they will only pay about $100 under the new installment model."Footnote 17

  8. Furthermore, a recent Statistics Canada publication indicates that the introduction of new device financing plans, with significantly lower subsidies, have materially increased the price that consumers have paid for devices. Statistics Canada's August 21, 2019 issue of The Daily publication, reporting Consumer Price Index data, noted that:

    "The widespread introduction of unlimited data plans coincided with a reduction in the subsidies for wireless devices, shifting more of the cost of devices to consumers. Consequently, the multipurpose digital devices index, which includes prices for tablets and smartphones, rose 42.5% month over month."Footnote 18

CRTC Should Focus on Lifetime Cost, Not Just Per-Month Financing Charges

  1. The CRTC should exercise caution in concluding that the introduction of longer device financing contracts will necessarily increase consumer affordability. Such a statement emphasizes only the consumer positives of lower per-month device payments, and ignores the fact that service providers very well may benefit financially from these plans by decreasing device subsidies for consumers. Lower monthly device financing payments must not outweigh other policy goals, including the continuing development of effective competition in the wireless sector.

V. New Device Financing Plans Increase Consumer Switching Costs

  1. The intent of limiting contract lengths in the Wireless Code was to "… minimize consumers' barriers to switching [service providers]."Footnote 19 The Bureau advocated for that principle in its 2013 submission to the initial Wireless Code proceeding,Footnote 20 and continues to advocate that position in this proceeding.
  2. The Bureau takes this position because competition works better when consumers have the ability to easily switch wireless providers.

The Marketplace Effects of Switching Costs

  1. Lower switching costs can result in greater competition.Footnote 21 The Bureau's 2013 Wireless Code submission sets out three principal reasons why switching costs harm competition. These reasons remain true today.
  2. In summary, switching costs can:
    1. Make it more difficult for competitors to attract customers.
      • When switching costs exist, any competitive offer designed to attract the customers of another service provider needs to be sufficiently large to offset any switching cost. This means that some smaller inducements may never be brought to market, as they would not be sufficiently attractive to overcome the costs of switching. This could limit the positive impacts that rival service providers have on competition.
    2. Reduce the likelihood that service providers will discount their services.
      • When a service provider runs a promotion, it does so at least in part with a view to attracting customers from other competitors.Footnote 22 Similar to the logic above, this means that service providers must run deeper discounts to overcome the costs of switching, meaning that some smaller discounts that would exist absent switching costs would become unprofitable. Again, this reduces competitive activity in the marketplace, and could deny consumers of some of the benefits that competition would otherwise deliver.
    3. Frustrate the entry of competitive service providers.
      • When a service provider tries to enter a new territory, or introduce a new product, it relies (at least in part) on attracting customers from existing providers. In circumstances where switching costs exist, smaller service providers may not be able to achieve the scale or scope of production necessary to enter profitably. Consumers in those areas are, therefore, denied the benefits of competition that such entry would bring about.
  3. Higher switching costs can reduce competitive intensity within a marketplace. When a large proportion of customers cannot switch their provider without incurring significant switching costs, service providers cannot realistically compete for those customers. This reduces the contestability of Canadian wireless markets, and results in lowered competitive pressure on service providers to deliver the best services at the lowest prices.Footnote 23 Recognizing this, the Competition Tribunal, in several other industries, has issued orders designed to lower switching costs.Footnote 24
  4. When switching costs are lower, service providers have a greater incentive to offer disruptive new plans into the marketplace.Footnote 25 This is particularly important at this point in the Canadian wireless industry's development, with the growing significance of facilities-based competitors, as well as other CRTC proceedings that are focused on improving wireless service competition in Canada.

Switching Costs Are Already Prevalent in the Industry

  1. Even under the current Wireless Code, there can be significant costs associated with switching providers. Device financing arrangements have been a part of the wireless industry for years and, when these arrangements involve subsidized devices, a consumer must repay any outstanding device amount before they can switch providers during the initial term of the contract (typically 24 months).Footnote 26
  2. These types of financing arrangements can create material blocks to switching. Presently, a consumer can obtain a subsidy in the territory of $1,000.Footnote 27 A consumer receiving a subsidy of this amount will be required to pay $250 to exit their relationship with a service provider even after 75% of their contract length has been exhausted. This is a significant amount of money that can make switching unattractive, even in the face of materially lower monthly service prices being offered by a competitor.Footnote 28
  3. While the Wireless Code has, at its heart, the intention to minimize switching costs, it does not entirely eliminate them. From that perspective, any move to further increase switching costs will serve only to exacerbate impediments to switching, with a resulting negative effect on competition.

Longer Contracts Mean Larger Switching Costs

  1. Longer device financing contracts make the costs associated with switching higher in every month of that contract.
  2. All else being the same, the outstanding device balance is higher in every month of a 36-month contract than it is in that same month of a 24-month contract. Figure 1 shows this effect for a hypothetical $2,000 device.Footnote 29

    Outstanding device amount after each month of a 24-month and 36-month contract

    • Figure 1: Outstanding device amount after each month of a 24-month and 36-month contract
      Figure 1: Outstanding device amount after each month of a 24‑month and 36‑month contract
      Month into contract Outstanding device amount
      24 months 36 months
      1 $1,916.67 $1,944.44
      2 $1,833.33 $1,888.89
      3 $1,750.00 $1,833.33
      4 $1,666.67 $1,777.78
      5 $1,583.33 $1,722.22
      6 $1,500.00 $1,666.67
      7 $1,416.67 $1,611.11
      8 $1,333.33 $1,555.56
      9 $1,250.00 $1,500.00
      10 $1,166.67 $1,444.44
      11 $1,083.33 $1,388.89
      12 $1,000.00 $1,333.33
      13 $916.67 $1,277.78
      14 $833.33 $1,222.22
      15 $750.00 $1,166.67
      16 $666.67 $1,111.11
      17 $583.33 $1,055.56
      18 $500.00 $1,000.00
      19 $416.67 $944.44
      20 $333.33 $888.89
      21 $250.00 $833.33
      22 $166.67 $777.78
      23 $83.33 $722.22
      24 $0.00 $666.67
      25 $0.00 $611.11
      26 $0.00 $555.56
      27 $0.00 $500.00
      28 $0.00 $444.44
      29 $0.00 $388.89
      30 $0.00 $333.33
      31 $0.00 $277.78
      32 $0.00 $222.22
      33 $0.00 $166.67
      34 $0.00 $111.11
      35 $0.00 $55.56
      36 $0.00 $0.00
  3. Wireless contracts are structured such that a consumer must pay off the remaining balance of their device before switching. Longer financing terms, all else being the same, mean that the amount the consumer must repay is higher. This higher cost makes it less likely that a consumer will choose to switch.
  4. As Figure 1 shows, this effect is most pronounced in the later months of a wireless contract. In fact, the largest differential is found in the 24th month, when the switching cost is $0 under a 24-month contract, but remains $667 under a 36-month contract.

Return Device Plans Mean Larger Switching Costs

  1. At least one wireless carrier has also introduced a financing plan where a consumer receives an up-front discount on the device, but either must return the device or pay back that discount at the end of their financing term.Footnote 30
  2. This is another effect being brought forth in the name of affordability that may have negative effects on consumer switching. While consumers pay less for a device up front, they are merely deferring that payment (in the order of $300Footnote 31) to the very time that a consumer would otherwise be most able to costlessly switch – the time at which their outstanding device balance would otherwise by zero.Footnote 32
  3. The CRTC should also consider the effect of this type of arrangement when assessing the effects that new device financing contracts have on competition and the marketplace.

CRTC Should Maintain its Objective of Minimizing Switching Costs

  1. Competition thrives when consumers have the freedom and ability to switch between providers; it is attenuated when consumers face significant switching costs.
  2. In determining this matter, the CRTC should focus on the costs that a consumer must pay in order to be able terminate their existing relationship with a service provider. When proposed new plans significantly increase switching costs for consumers, it is difficult to imagine how they are consistent with the original intent of the Wireless Code to "… minimize consumers' barriers to switching [service providers]".


  1. The Bureau raises two competition-related matters that the CRTC should consider in making a determination during this proceeding:
    1. First, the CRTC should recognize that longer financing plans will not necessarily result in greater affordability for consumers, and that lower monthly device financing payments must not outweigh other policy goals, including the continuing development of effective competition in the wireless sector.
    2. Second, the CRTC should recognize the important effect that switching costs have on competition, and deny any efforts to significantly increase switching costs through this proceeding.
  2. With the growing competitive significance of smaller facilities-based providers, and other CRTC proceedings focusing on improving wireless service competition in Canada, this is a pivotal time for the Canadian wireless industry. By enacting and enforcing rules that preserve the ability of consumers to switch between competing options, all Canadians benefit from lower prices, greater choice, and increased levels of innovation in the marketplace.
  3. For the purposes of this proceeding, the designated representative of the Commissioner is:

    Leila Wright
    Associate Deputy Commissioner of Competition, Competition Promotion Branch
    Competition Bureau
    15th Floor, 50 Victoria Street
    Gatineau, Quebec K1A 0C9

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