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The ‘false economy’ of handset subsidies


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Tim Deluca-Smith, VP of Marketing at WDS, argues that handset subsidies have created a generation of consumers with little appreciation of the true value of mobile devices.

The industry was founded on heavily subsidised devices. Indeed, subsidies are one of the pillars on which the ecosystem was built. They have served the industry well as it developed, helping operators to offer attractive handsets to consumers at affordable prices and gain critical market share. However, as device innovation has accelerated, the same subsidy model has begun to work against operators.

The rapid price of device obsolescence

Smartphone innovation has accelerated at such a pace that the average lifespan of a flagship device is now less than half of the average two-year contract. This is leading to many contract customers being asked to commit in excess of US$1,500 over two years to use a product that will be discounted to make way for a replacement within months of launch. As a result, users are becoming dissatisfied with their devices and ultimately, their serving operator.

Creating a false economy

By disguising the value of the latest devices through subsidies, operators have created a breed of consumers that simply fail to appreciate their full commercial value. These same consumers have no issue paying the full price for tablets, so why not smartphones? Put simply, it’s because they don’t realise the full cost of the smartphone and, in their minds, have never had to pay it.

While subsidies are significantly impacting operator margins, removing them entirely is a very challenging process. The majority of carriers have been reluctant to drop subsidies due to fears their subscribers will become dissatisfied and switch to operators that maintain them.

The trouble is that new devices are becoming more and more expensive, meaning operators are being forced to lengthen, not shorten, contracts to recover the subsidies committed. One year and 18 month contracts have gone. Now customers can expect a two year contract as normal. Ofcom has even had to step in to regulate from increasing contract terms to 36 months.

Although such lengthy contracts have serious implications for customer device satisfaction and longer-term customer loyalty, operators have little choice in deploying them. They remain a critical tool in retaining customers and clinging to profitability. Despite this, the direction of travel is very much moving away from subsidies. T-Mobile US, AT&T and Verizon have all changed their contract plans. In the UK, O2 offers ‘Refresh’, a plan designed to unbundle product and service, and EE has launched ‘Swap’ –  an offer which lets customers buy their way out of their contract to upgrade to a new 4G phone for a one-off fee.

Such plans essentially amount to device financing schemes in which the customer’s subsidised device is covered by a separate bill over an agreed period of time. Not only does this deliver greater transparency, allowing the customer to gauge how much they are paying for their ‘free’ smartphone, but it also allows the payment plan to be settled outside of the contract, or extended over a new device. This is crucial in changing the consumer mindset towards smartphones to try and emulate the same value they place on tablets.

The overhauling of mobile subscriptions must be one of the crucial goals for the mobile industry.

Outside of rapid customer acquisition, legacy subsidy models today do little for the long-term financial health of the industry. Neither do they offer the transparency and flexibility that other industries offer in their pricing which boosts genuine value.

Now is the time to overhaul the traditional business model behind mobile subscriptions; and create a generation of customers able to appreciate the true value of smartphones beyond just price.

tdsTim Deluca-Smith, VP of Marketing at WDS

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members.

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