Get used to pricey smartphones and a big push for the mid-range

iPhone

Last week, the head of Canada’s central bank, Stephen Poloz, scared everyone in the Canadian tech industry (and beyond, but we’re myopic here in our bubble) by warning of continued weakness in the Canadian Dollar. At 69 cents and dropping, Governor Poloz says the weak Dollar is necessary to offset losses from slipping commodity prices such as oil, natural gas and other Canadian exports.

But one side-effect of this prolonged weakness, aside from the lower cost of petrol, is higher prices for imported products like smartphones. And as we discovered earlier this year with the release of the iPhone 6s, due to the speed at which prices change for components inside the world’s most powerful pocket computers, coupled with the sinking Dollar, things can change very quickly in the commoditized world of electronics.

Nearly every currency was weak against the US Dollar in 2015, which forced Apple to raise the price of its products, especially the iPhone, to offset any potential revenue losses. But as we found during a busy buying season, Canadians are not used to paying those kinds of prices for their handsets, even the latest and greatest iPhone; many salespeople at carrier stores and retail partners like Best Buy Mobile told MobileSyrup that the most popular devices sold throughout the holiday season were the iPhone 6 and 5s, devices from 2014 and 2013, respectively.

A weaker Dollar has all kinds of implications for Canadians looking to upgrade their smartphones. Carriers are of course aware of the disparity between what high-end devices used to cost when the Dollar was stronger and what they do now, but they’re also attuned to the way many Canadians bought, and still want to buy phones during the era of three-year contracts, when even the most expensive devices were sold for under $100.

Until the summer of 2013, Canadians generally signed up for three-year contracts, which in turn allowed the carriers to heavily subsidize the cost of a high-end smartphone to a base price under $100. When the CRTC began enforcing the Wireless Code of Conduct, effectively banning three-year plans, the cost of smartphones rose along with the shorter amortization period; now, they have risen again.

Carriers often emphasize that they are not in the business of selling phones, that, in the course of a quarter they may only earn a few million dollars from the devices they sell. Instead, the subsidies Canadians have grown dependent on act as gateways to long-term contracts, during which the the telcos take home most of their profit.

These same carriers, however, are still the primary retail conduits by which consumers purchase their devices, and the process of buying a smartphone is often inextricably linked with signing or re-signing one of those lucrative contracts. As hardware costs have risen over the past year, carriers have moved increasingly to pushing less expensive (often called entry-level, or mid-range) devices running Android.

A few years ago, there was a palpable, often debilitating badness to cheap mobile hardware. They had bad software, poor battery life, and awful screens that were difficult to navigate, and even harder to use for anything resembling complex input. But as the PC industry commoditized in the 2000’s, pushing component prices down to a fraction of what they were 10 years earlier, the price of smartphone parts, and their subsequent wholes, quickly dropped, spurred by an influx of higher-quality off-the-shelf components. This hardware, paired with Google’s Android operating system, which costs nothing, required only minor work to adapt to almost any variation of hardware components.

While Chinese OEMs like ZTE, Lenovo, Huawei, Alcatel OneTouch and Xiaomi slowly, and then more rapidly, ate into the market share of incumbents like Samsung and LG, in 2013 Motorola unveiled the Moto G and Moto E, which, under Google’s watchful eye, provided a high enough value-to-performance ratio for many consumers to abandon their plans for expensive smartphones. Soon, the carriers had additional options to promote, all while being able to maintain their beloved “$0 on contract” price points that consumers had come to expect.

Today, we’re well past such proverbial sticker shock. According to Lixin Cheng, ZTE’s rotating North American CEO, the company has been aggressive about investing in Canada, particularly because it sees demand for higher-quality, cheaper smartphones. “When we design and manufacture products, we communicate locally with customers, but we are also able to leverage our enormous Chinese platform to specialize for each market,” he said during a recent visit to Toronto to promote the ZTE Axon, an Android smartphone released exclusively through Fido.

Browsing through any carrier’s offerings reveals a widening maw of pricing extremes — $150 for the Moto E on one end, and $1289 for a 128GB iPhone 6s Plus on the other — but a much less severe compromise in experience. Indeed, for most people, the Moto E is a perfectly competent communication tool.

There are advantages to users paying less for smartphones beyond just the inherent cost savings; the less a carrier has to subsidize a handset, the more willing they are to pass along those savings to the consumer. In recent months, for example, Rogers implemented a new plan pricing tier dubbed “Smart Tab,” which asks consumers to pay more for their handsets up front in order to save $10 per month on their monthly bill. These financing options are only possible because there is a bevy of choice in the price of handsets themselves.

According to retail employees interviewed by MobileSyrup, in-store representatives are being incentivized to propose cheaper alternatives to high-end Galaxys and iPhones when walking customers through their handset options, espousing the virtues of mid-range models from Samsung, Sony or LG, and lesser-known choices from companies like ZTE and Alcatel OneTouch. As the monthly cost of service rises, carriers will look to work with manufacturers that are willing to undercut the giants in order to get their brands on the wall.

In the meantime, the most expensive handsets — the next iPhone, and flagship Galaxys — will continue to be twice the cost on contract than many entry-level devices are outright. That exposes an ongoing tension faced by Canadian carriers: higher-cost smartphones tend to attract higher-value customers. Over the years, companies like Rogers and Bell have revealed that iPhone customers tend to spend more on their monthly bills, and are more loyal to the Apple brand than Android users.

While economists hypothesize that there is a bottom in sight to the Canadian Dollar’s weakness, carriers pushing less expensive smartphones has as much to do with establishing leverage against the dominant market position of Apple and Samsung, according to a telco representative who chose to remain anonymous due to the sensitivity of the subject matter, as it does with offsetting the perception of higher plan costs proliferating the Canadian wireless industry.

Carriers are also keen to use more expensive smartphones like the iPhone 6s and Galaxy S6 edge+ to promote new wireless technologies such as carrier aggregation and LTE-Advanced. Since Canada’s wireless networks lack the artificial speed tiers popularized in the broadband business, telcos are eager to establish new ways to push premium smartphone experiences without alienating their core partners.

Going into 2016, those low-cost smartphone providers are going be even more important to carriers’ bottom lines, which is good for consumers clambering for more choice.

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