CRTC locks out carriers’ use of handset subsidy as key contribution deduction

The CRTC has closed the door one final time on a potential loophole that would have decreased the amount the country’s wireless operators would have had to pay into the national contribution pool. Telecom Decisions CRTC 2002-22 and 2002-23, released April 12, reaffirm two previous rulings on the matter. Several carriers wanted to be able to deduct the actual cost of the handset from contribution-eligible revenue by designating a portion of a subscriber’s bill as counting towards the full handset cost. Both Rogers Wireless Communications Inc. and Telus Communications Inc. had previously told the CRTC that they should be able to use this practice. Despite support from the majority of the country’s other wireless players, the commission disagreed and ordered both carriers to resubmit 2000 contribution documents, excluding the use of the additional revenue from handsets. In two prior decisions, the commission had ruled against this practice. In Order CRTC 2001-220 and Order CRTC 2002-221, the CRTC said that the use of service revenue to cover the gap between the up-front price of the handset and the actual cost of the device was not allowed under the original contribution ruling of November 2000 (Decision 2000-745). In its Part VII application, Telus refuted the commission’s claim that handset subsidies are a marketing tool and a simple cost of doing business. The company submitted that "it is incorrect to characterize the gap between the up-front sale price paid by the customer for the terminal and the cost of the terminal, as ‘an expense of doing business’ or as a ‘means of seeding the market’." At that time, Telus contended that in subsequent clarifications related to contribution the commission decided to narrow the scope of the decision in mid-stream and levy an additional tax on the wireless industry to make up for an expected shortfall in contribution revenue. Microcell Telecommunications, which threw its support behind Telus, had previously filed in 2000 contribution documents using the extra handset revenue. After the commission brought down those two decisions, Microcell re-filed its contribution report as instructed by the CRTC. Telus, however, chose to appeal those two decisions in its Part VII petition of last September (RoW, Oct. 15/01). Since the new contribution regime came into effect last January, Canada’s wireless industry has been battling the commission over the significant increase in its share of the contribution pool. While long distance providers have seen a dramatic drop in the amount they pay, wireless operators have experienced an approximately 1,200 per cent increase in contribution payments. Payments increased from about $15 million to $200 million from 2000 to 2001 (RoW, Dec. 11/00). Offering deep discounts in handset prices is a standard industry practice used to attract new subscribers. But in its latest ruling, the commission concluded once again that offering subscribers handsets below the actual cost is a marketing tool, which is considered a cost of doing business. In the March 15, 2001 Order CRTC 2001-221, the CRTC had already found that the use of service fees to recover the actual cost of the handset fell out of the scope of the original decision. "The commission found that the adoption of a pricing model, including the use of a subsidy for the purpose, among other things, of increasing the penetration of a particular service or increasing market share, is essentially a marketing strategy and a cost of doing business," the CRTC reaffirmed in Telecom Decision CRTC 2002-22. The commission wrote that it doesn’t believe Rogers is explicitly using service fees to recover the cost of the handset. "The commission is of the view that if RWI explicitly recovered the through a monthly fee, the subscriber would see a permanent reduction in the monthly fee once the was fully recovered by the company," the CRTC wrote. "Although RWI provided evidence that it offers various incentives to entice subscribers to select another subscription plan once the initial recovery period has ended, there is no evidence that the subscriber’s monthly invoice is ever reduced." In ruling against Telus’ Part VII application, which was supported by Microcell, the commissioned noted that Telus’ methodology ran counter to determinations made in the original contribution ruling – Decision 2000-745 – and Order CRTC 2001-220 and Order CRTC 2002-221. "Commission staff noted that the approach taken by both companies would negate the basic principles of the revenue-based contribution," the CRTC stated in Telecom Decision 2002-23. "Cost elements, such as marketing strategy of discounting , cannot be included in the calculation of contribution-eligible revenue." Telus’ struggle was supported by several parties, including the Canadian Wireless Telecommunications Association. The association stated in its comments that prior to 1982, the price of a landline terminal was included in the subscriber’s monthly service fees. The wireless lobby noted that in 1984, the commission approved unbundled rates for the services and the equipment, which is similar to the pricing strategy being employed by wireless service providers. The commission concluded, however, that it considered that offering a discounted handset and services is a package, not a bundle. "No portion of the monthly charges can be allocated to terminal revenues for the calculation of contribution-eligible revenues," the CRTC wrote in its April 12 Telecom Decision CRTC 2002-23.

CRTC locks out carriers’ use of handset subsidy as key contribution deduction

News | April 16, 2002

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CRTC locks out carriers’ use of handset subsidy as key contribution deduction

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