Saturday, 5 November 2005

Mobile Operator Subsidies will Decline

In some countries, the least expensive way to buy a mobile phone is with a contract. Even if you're Paris Hilton. When one adds up the cost of a 12 monthly payments, the phone often still costs a consumer less to buy than they could buy it without a contract. Look at the secret deals a mobile operator will often offer at the end of a contract to customers who are quite happy with their current phone. Threaten to switch operators you might get offered a contract which is effectively free for the following year.

The reason, of course, is operator subsidy. The operator sells the consumer a phone for below cost price -- sometimes even free -- in order to lock them into a 12, 18, or 24 month contract. Some 30% of the published monthly contract price is accounted for by subsidy clawback. This is a classic razor and blades business model.

Operators have huge buying power and so can source the devices for far less than a consumer would pay. Operators will also usually ensure that the phone is locked to their network, making it difficult for a consumer to switch service to another operator -- known as a SIM lock. Such subsidy business models are common in countries like the UK, Germany, and to an extent the US (at least for GSM operators). They are however illegal in some other countries.

However, this is changing. Although many consumers are happy to upgrade their phone every year -- essentially as a fashion statement -- increasing numbers of people are wising up to the way the industry works. They've realized that they can pay far less by keeping their phone and negotiating a lower tariff. This shift has been enabled by two key factors:
  1. Back-street unlockers -- the ability to remove the SIM lock, allowing the user to switch operators.
  2. Number portability -- the ability to move to another operator yet keep one's number, which is a strong bargaining chip.
In the future, subsidies will become smaller and much less common. For example, in the UK we've already seen subsidies disappear for phones without a contract (i.e. pay-as-you-go). Contract subsidies are sure to follow over the next few years.

2 comments:

Twm said...

It's also interesting to note that in Japan, number porability is about to be launched next week.

http://www.nttdocomo.com/pr/2006/001281.html

This tears down a significant barrier to swapping carrier(operator) in Japan where DoCoMo has enjoyed quite a monopoly. Half of all mobile subscribers in japan are DoCoMo customers.

Ofcom were looking at NP in the UK with requests for comments from the operators in 2004. I'm not sure if this has seen it though to the consumer yet.

Some of the newer N-series Nokia "multimedia computers" are very expensive and with an emphasis on web services which work over wifi as well as 3G, it looks as if there may be other revenue streams which may bypass or eclipse the operator's normal "blades".
It's pretty clear that all the mobile operators are thinking consolodated broadband/mobile service - where you get landline, mobile and broadband/3G data in one package. The traditional analog landline is likely to be merged with voip which should hopefully bring universal number portability accross fixed and mobile calls.

But the consumers need to know the benefits before they sign the contracts.
My parents both made use of the free email account with their broadband supplier, which has created a "too much hassle" barrier in switching - even though they have the most expensive broadband deal.
I am getting them to use gmail now which i have some faith will allow free "email portibilty" for the forseable future.

Richi Jennings said...

Yes we've had number portability in the UK for some considerable time. I myslef have switched operators twice since then, moving my number from Vodafone, via Orange, to T-Mobile.

Interesting info. about the Japanese situation.

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