Aim low, shoot high: Telus scores with discount Koodo brand

When Telus Corp. launched its Koodo discount brand in March, cellphone subscribers could be forgiven for assuming they had stumbled into a time warp.

First there were the brand's ads. Featuring hot colours, workout-video themes and spandex as far as the eye could see, they called to mind an era of leg warmers, moustaches and Olivia Newton-John videos.

Then there was the brand itself. In an era of 3G phones capable of surfing the internet and downloading videos, Koodo was offering only three (and later four) simple phones and plans that could go as low as $15 a month.

Finally, there was something odd in the information age about a telecommunications company starting a new brand, and then doing everything to distance themselves from that brand, as if consumers wouldn't be able to do a Google search and see that the two were indeed part of the same company. Koodo commercials and advertisements made no mention of Telus, and Telus granted few interviews before or after the launch to promote the product.

As a result, Koodo looked like a fresh new player in the telecommunications game, one offering "Fat-Free Mobility" that let consumers "drop that chubby contract" and "avoid system access fees," as their ads said.

The immediate reaction of technology bloggers and industry observers when the brand launched was a shrug.

Telecommunications blog Wireless North ran the news with the headline "Telus launches Koodo [but why?]" and suggested the brand be called "Metoo" because it was following in the footsteps of Rogers and Bell, which have their own discount phone brands, Fido and Solo, respectively.

"Don't let the fresh coat of paint fool you. Koodo's mobile offerings are already offered through Telus and come with a minor changes in the price plan structure," a Financial Post blog opined.

A funny thing has happened since then, however. Though no official numbers have been released, Telus's recent earnings suggest Koodohas beena bona fide hit.

Big gains for Telus

The number of Telus subscribers grew bya record 176,000 in the second quarter,according to the company's quarterly earnings report, almost half the 359,000 total subscribers added by the big three providers Rogers, Bell Mobility and Telus in that period.

Telus also saw its monthly average revenue per wireless user drop 1.4 per cent to $62.73, a drop analysts credited to Koodo's lower prices.

Representatives from Telus declined to comment on the Koodo brand. Executives with the company also refused to be specific during their conference call on how many subscribers Koodo had signed up, but RBC Capital Markets analyst Jonathan Allen later estimated the number could be more than 50,000.

Telus lists Koodo usersamong its post-paid subscribers, since the brand charges monthly rates and lets users run a "tab" on the cellphones they purchase. But in many respects, the brand's lack of frills and locked-in plans gears the phones toward consumers more likely to be in the market for lower-cost prepaid plans.

And prepaid plans, while making up only 21 per cent of the 20 million wireless plans in Canada, are a growing option for consumers switching from landline telephone services, said Amit Kaminer, a telecommunications research analyst with the SeaBoard Group.

The number of prepaid subscribers in Canada grew by 350,000 in the last year, said Kaminer, and prepaid churn a measure of how many customers switched providers was high, suggesting a dynamic and competitive market.

Kaminer said Telus was successful with Koodo because it tapped into that volatility.

Telecommunications analyst Mark Goldberg said the success of the brand shows just how much room for growth there is in the Canadian wireless market, particularly for low-end, contract-free phones.

"There are a lot of people out there still not connected to mobile services," said Goldberg. "And what the Koodo brand did was tap into consumer unrest over things like system access fees and long-term contracts."

Success bodes well for new carriers

Many of the features system access fees, long-term contracts, termination fees that Koodo slams in its cheeky ad campaign are still present in parent brand Telus's wireless offerings, as they are with plans found on Bell and Rogers.

Kaminer suggests this matters little to consumers.

"It takes time for consumers to make the connection between brands," he said. "I think Fido customers know that Fido and Rogers are connected, but I don't think Koodo customers have made that connection to Telus. But mainly, they don't care as long as they have the prices people want."

Goldberg agrees, suggesting consumer discontent has been overstated because of a vocal few. Koodo's apparent success is a sign that the products "are priced exactly right," he said.

Thomas Purves, a Toronto-based technology consultant who runs the Wireless North blog, said the people likely to bevocal in their opposition to wireless carriers in Canada are not Koodo's target audience.

"The more vocal consumers tend to be more savvy, more informed and also more bitter," he said. "Koodo's market is everyone else."

The campaign has been more successful than he thought it would be, he admits.

"Aesthetically I hate the brand, but in some ways it's like No Name products," he said. "It's just ugly enough that people think they must be getting a deal."

Purves said that Koodo also has benefited from generalfrustration with Canada's carriers, a trend he said could be a good sign for new entrants to the market that bought wireless spectrum in this year's federal auction.

"I see this as a positive sign for the new entrants. Koodo has shown that this market for low-end phones is less sticky, meaning consumers are more likely to switch," he said.

Kaminer agrees, suggesting low start-up costs will make the prepaid and low-end postpaid market attractive for potential new carriers like Globalive Communications Corp., which provisionally won 30 licences for wireless spectrum across Canada at a cost of $442 million. The recent auction of wireless spectrum held by Industry Canada raised a total of $4.25 billion.

That means the market where Koodo has helped make waves could become flooded, said Kaminer.

"For new carriers, this market is low-hanging fruit," he said.