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Changes in the operators' handset subsidy policy

Changes in the operators' handset subsidy policy

Par Thomas rivoire - le 25 octobre 2011

However, in developed nations, telecoms markets are now saturated. Everyone owns a mobile phone and users are not necessarily interested in changing it. Added to which, the global economic downturn has had a huge impact on consumer spending.

This new context has shifted the goalposts. Operators are now offering new types of subscriptions, with new modes of subsidy.

This article was written as part of a telecoms market strategic and marketing intelligence programme for the France Télécom-Orange group's Market Intelligence business unit.

Criticisms of the conventional handset subsidy model

Minimum contract lengths that are too long?

The handset subsidy model involving a minimum contract length has been criticised by various players in the telecoms sectors, especially by the regulators, for the fact that length of commitment is closely linked to the level of subsidy.

In France, over 80% of post-paid subscribers are tied to their operator on a contract lasting more than 12 months (source: ARCEP, February 11). For the regulator, these contract lengths help to slow up competition and the fluidity of the market is altered as a result. Moreover, the coupling of fixed and mobile Internet offers ("quadruple play" offers) has also restricted changes in operator.

Lack of transparency about the level of subsidy in monthly plans

When customers commit to a contract with an operator, they do not know how much of their monthly subscription goes towards subsidy of the handset and how much covers consumption (voice and data).

Furthermore, the differences in price for a handset and its use between a 12-month contract and a 24-month contract are sometimes not discernible.

Ultimately, customers don't really know what they are paying for. ARCEP is studying the possibility of distinguishing between the amount paid covering the subsidy and that covering the subscription. This would mean customers could pay just their own subsidy and not finance part of the subsidy of other customers.

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|Advantages of subsidies

Although it has been criticised, the handset subsidy model does nonetheless have certain advantages: customer retention, revenue insurance and stability, adoption of new technologies, etc.

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New types of subsidies

Subscription subsidies or "reverse subsidies" for pre-paid customers

Pre-paid customers clearly cannot benefit from traditional handset subsidies from operators. Indeed, the very nature of pre-paid phones is that customers are not tied to a contract, so it is pointless for operators to subsidise handsets when customers are free to change provider.

However, in some countries where pre-paid phone predominate, telecoms operators have found ways of financing or incentivising purchases. The aim is to drive take-up of 3G services.

In China, for example, where close to 80% of users have pre-paid phones, operators are offering an original means of subsidy to these customers: subscription subsidy, or reverse subsidy.

Customers buys their handset at full price from the operator. The operator then gives back this amount (or more) in the form of reductions to the cost of their monthly communications, provided the customer exceeds a certain level of consumption. These discounts last for a maximum period of 24 months. The subsidy is available for 3G handsets.

Consumers are therefore strongly encouraged to stay with the operator in order to take advantage of the subscription discount. The operator thus secures a degree of loyalty from pre-paid customers.

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These reverse subsidies are also used in India by Airtel and Aircel to sell the iPhone 4 and to obtain a return on their massive investment in 3G networks as quickly as possible.

The "SIM only" model firmly established in the landscape of mobile offers with adapted means of subsidy

SIM only deals have developed greatly in Europe in recent years, in markets that are relatively saturated and traditionally dominated by post-paid contracts. In France, SIM only deals have been around for a few months and are strongly supported by ARCEP which hopes that each deal is offered with or without a minimum length contract.

|What are SIM Only deals?

SIM only deals, as its name suggests, are mobile plans where the operator only provides customers with a SIM card. These plans are aimed at users who already have a mobile phone and who do not wish to change it.

Some operators offer a discount on subscription costs to counter the lack of handset subsidy. Some operators impose a certain length of contract to be able to benefit from this reduced price, whereas others don't and leave customers free to change operator whenever they wish.|

As "SIM only" deals become standardised and the gap widens between expenditure on handsets and calls, operators have developed various systems to enable customers to buy a mobile phone:

- Leasing : O2 in Germany

O2 has introduced a phone leasing programme called "My Handy". This offer is available to all customers, whether they are with O2 or not. My Handy is available for a wide range of handsets, mainly made up of smartphones.

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Customers pay an initial amount set by O2; this amount is specific to each handset. Then, depending on the option chosen, customers pay a set monthly amount during 12, 24 or even 48 months for the most expensive handsets. The final price paid is more or less equal to the market rate for the handset.

Customers are free to leave before the end of this period, but in this case, O2 keeps the handset. On the other hand, if the customer reaches the end of the contract, he/she then becomes the owner of the phone.

- Free subsidy in Denmark

In the same vein, Danish operators are now offering post-paid deals with a six-month minimum contract. Despite this short minimum period, they are offering various forms of subsidy, the terms of which are relatively free.

With the Flex plan, Telia customers who want to acquire a smartphone can choose the initial amount paid at the start and then the duration or the amount of the monthly payments. The total amount corresponds to the "market" rate for the handset.

The operator details the amount covering the subscription and that covering payment of the smartphone in the monthly payments. This means that once the phone has been paid for, customers only pay their subscription (and they are in any case free to change operator after six months).

Focus on France: minimum contract periods and subsidies shaken up by the forthcoming arrival of Free

Free is due to enter the French mobile phone market in January 2012. The new operator has announced that it does not intend to subsidise handsets. However, it is expected to offer those customers who wish to acquire a mobile phone the chance to spread out the payments (at cost price) over several months.

This new operator, competition among the MVNO and lower prices (call termination rates) have prompted MNOs to adapt their offers. 2011 has seen the emergence of many aggressively priced deals and plans without minimum contract periods.

In June 2011, SFR changed all of its consumer mobile phone plans, cutting the number of fixed price plans from 33 to 8. Each subscription is available with or without a phone and with or without a minimum contract period, according to the following principle:

In addition, where a subsidy is applied, the price of the subscription drops to that of the plan without minimum contract period and without mobile after the 12- or 24-month period of the contract, i.e. once the phone has been "reimbursed".

SFR is the first operator in the French network to reformulate all of its offers, and incorporate plans without minimum contract periods and without handset subsidies.

All the other operators (Orange, Bouygues, Virgin, etc.) also offer "SIM only" deals.

Conclusion

The markets are changing, as are consumer expectations. Of course, the traditional handset subsidy model still has some life left in it, especially in France, but offering an alternative, represented by the SIM only deals, is necessary to tap into all areas of the market.

The forthcoming arrival of Free is expected to bring with it a host of changes for the French telecoms market. Will it also instigate an entirely new relationship between subsidies and mobile phones?

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