Consumers don't really like to shell out hundreds to buy smartphones up front

MONTREAL - Canadians may grumble about three-year cellphone contracts, but observers say they usually don't want to spend $500 or more up front to buy a smartphone.

Instead, they often opt for that three-year term, which provides the biggest subsidy to spread out the cost of an iPhone, Android or BlackBerry device.

"We are the world leaders in the three-year contract," said telecom analyst Iain Grant of the SeaBoard Group.

Canada is one of the few countries to offer three-year contracts. For example, telecoms in the United States, England, France and Germany offer only two-year contracts, Grant said.

The Canadian Radio-television and Telecommunications Commission decided to tackle problems around the three-year contract rather than remove the popular option in its draft wireless code, released this week.

"There are some people who find the three-year contract warm and cuddly, or they appear to," Grant said, noting that Canadians complain about these contracts but still sign up for them.

Wind Mobile chairman and CEO Anthony Lacavera said he had hoped his customers would buy their smartphones up front, but the new wireless company had to drop that strategy in 2010, a year after launching.

"People don't want to lay out $500 bucks," Lacavera said. "They want the phone financed."

Wind Mobile's customers have a tab, allowing them to pay down the cost of their smartphone monthly. If they decide to leave no-contract Wind, they have to pay off the balance.

The CRTC said it heard a lot of "anger" from Canadians about three-year contracts when it was putting together the draft version of a national code for wireless services, released on Monday.

However, the regulator didn't take up some Canadians on their suggestion to get rid of it and instead dealt with such issues as early termination fees, allowing the consumer to cancel service at any time.

If the consumer cancels the contract early, the consumer cannot be required to pay any fee, charge, penalty, interest, or other amount other than the termination fee, the draft code says.

That would include paying off the subsidy for the smartphone as well as any services provided up until the time the contract was cancelled.

Grant said the "devil is in the details" but applauded the CRTC for taking on complaints about the three-year contract.

Rogers (TSX:RCI.B), Bell (TSX:BCE) and Telus (TSX:T) say most of their post-paid customers choose contracts that have device subsidies.

"Superphones, smartphones and tablets are increasingly more complex and powerful devices and Canadians overwhelmingly prefer the heavily subsidized price we offer on the hardware with a three-year term," said Bell spokesman Jason Laszlo.

Meanwhile, consumers who buy their own smartphones up front, don't always save on their monthly bills, Grant cautioned. Discounts are usually built into getting a monthly plan with a subsidized smartphone, he said.

"When you're buying a la carte you often don't get the table d'hote with its implicit discounts," he said. "Most of the iPhone plans from our major carriers are all designed around the fact that you would get the phone from them."

Grant suggests that a consumer buy her own smartphone and ask for a discount, 30 per cent for example, from the wireless carrier for doing so.

"Give me a bring-my-own-phone discount."

The carrier's fee for a monthly plan should still be profitable on its own if consumers do this, he said.

The CRTC also consumers are asking for clear language in their cellphone contracts and want to be able to put a cap on extra fees.

The telecom regulator has said it wants more comment from Canadians on what they think of the first draft of the code for a competitive wireless industry.

Hearings on the national wireless code will be held the week of Feb. 11.