Handset Subsidies – To Do or Not To Do?

In the past half a decade or so, one of the key drivers of the mobile communication sector is the rapid adoption of premium smartphones. The most popular form of selling smartphones in developed countries was using smartphone subsidies where the mobile operators offer customers with smartphones at low upfront cost and customers repay the price of the handset monthly throughout the term of the contract. The advantages of offering subsidies were clear: to ease the customer burden of paying a high price upfront for the smartphone and to increase smartphone adoption resulting in higher data revenues.

But as prices of premium smartphones started increasing, subsidies started threatening operator margins. Operators were left with no other option but to increase mobile plan tariffs and the handset subsidies became, in the words of Illiad’s founder Xavier Neil, “bad loans” where consumers end up paying back in the form of hidden fees and higher contract prices that amounted to interest rates of 300 to 400 percent in a two-year contract. A recent report done by the Organization for Economic Co-Operation and Development (OECD) on “Mobile Handset Acquisition Models” concludes that in cases where operators also allowed for the possibility of purchasing the smartphone device independently, the bundled handset discount plans represented a higher total cost for the consumers when accounted for throughout the length the contract. This muddied the waters as clarity in tariff plans and transparency towards customers started diminishing. Although removal of handset subsidies seems to be a valid argument for the operator community, it’s not necessarily easy to implement. Allow me to demonstrate two examples where operators discarded subsidies and their impacts.

Example 1: In Spain, Vodafone announced in early 2012 that it would stop handset subsidies and focus on reduction of resale tariffs even though at the time approximately 97% of the Spanish market handsets were sold with some type of bundled discount. But shortly after, Orange Spain made an announcement to retain mobile handset subsidies. The weak macro economic condition in Spain, coupled with simplified number portability favored Orange resulting in high net subscriber additions at the expense of Vodafone. Consequently, Vodafone had to re-introduce handset discounting offers in the second half of 2012 to stabilize its post paid subscriber base.

Example 2: Earlier this year, T-Mobile announced that it would abandon handset subsidies and multi year contracts following its “un-carrier” strategy. It also introduced Simple Choice plans that don’t have contract terms. Furthermore, in order to ease the customer burden from paying for a high price phone, T-Mobile introduced interest-free financing plans for smartphones. With an increase in post-paid subscriber count for T-Mobile by 3% in Q2 2013 compared to the previous quarter, this strategy is proving to be successful. In fact, it was the first time since 2011 that T-Mobile recorded positive postpaid net subscriber addition.

The long-term impacts of operator strategies towards handset subsidies are not clear yet, but what is clear is that the way these models are implemented and the local market conditions can be the critical drivers of success. As seen from the two examples, although the strategy seemed similar – to eliminate handset subsidy – T-Mobile’s implementation seems to be tailored to the market conditions and to send a clear message to the customers on the potential benefits.

Although the advantages of removing handset subsidies in developed mobile markets are apparent, in my opinion mobile operators need to take that decision based on the very local circumstances, such as general economic conditions, competition moves, demands for transparency in tariffs, popularity of bundled prices, and specific customer needs. It would in any case be a challenge to completely take away device subsidies especially in countries with temporary (or permanent) societal economic downturns, such as Spain for example. But once the customer is educated and empowered with transparent plans and tariffs, he/she will increasingly be less prone to opt for “free” smartphones.


Hari is a Consultant at Northstream

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