Smartphones subsidies, no credit – no problem

Almost all the mobile operators around the world have offered or currently offer what is called smartphonessubsidies”, as a way to attract customers onto buying new handsets at cheaper prices, while engaging them on long-term service contracts with the operator. So this is like buying a smartphone on credit, and of course an exercise to increase the profitability of the handsets for the operator.

Although these offers seem quite positive for the customers, making simple math you can often discover these are not. Taking an example from one of the top carriers in USA, you find buying a subsidised Iphone on a two years contract and a decent plan can cost you at the end: $200 + ($100/month) x 24 = $2600. While a no-contract and no-subsidy Iphone on equivalent plan for the same time could cost you: $650 + ($45/month) x 24 = $1730. So in example you might end up paying additional $870 for buying a subsidised phone.

Subsidy

Beginning of the year T-Mobile changed the strategy with the announcement of ending the handsets subsidies, and of course, AT&T and Verizon among others looked at this move closely trying to understand the strategy (here). To me the strategy was simply trying to differentiate themselves from the competition, by offering “lower” rates on the monthly plans while having the full price for the actual handsets. Think on the tablets market where we all buy these devices at full price with no subsidy, and consider now how successful the tablets’ market is. You would at least agree there is an irony as a tablet functionality is very similar to a smartphone, but the operators do not offer subsidies for these.

Even apart from the simple differentiation fact, the operators in general are eventually seeing how the subsidy model is no longer paying off as expected due to the apparent innovation slowness. As the smartphones are becoming more durable, and as the Sprint CEO Dan Hesse said during a conference this year “…the subsidies just keep going up… the industry cannot afford to upgrade as often…” (here). The situation is even more radical in Europe, where according to a research from Informa Telecoms & Media beginning this year “…almost 30 operators (in Europe) have already dropped handset subsidies for some or most customers…” (here). In this case operators like Vodafone or O2 are replacing the subsidies with financing and leasing plans, much more profitable for the operators and allowing them keep offering latest and originally expensive handsets at low prices. Informa’s analyst Francesco Radicati comments, “The rising cost of devices like the iPhone means operators have to pay increasingly large subsidies to offer ‘free’ phones. Financing allows operators to continue offering phones for a low up-front price without subsidizing them; as an added bonus, it makes it easier to market smartphones to consumers on pay-as-you-go.”

An interesting change will be added when the LTE-only devices are available starting next year. As the voice will be also handled in the LTE chipset along with the data, and no longer requiring the current CDMA chipset for voice, the cost of producing the smartphones should theoretically be lower. Verizon CFO Fran Shammo already made the announcement they would launch VoLTE by the middle of 2014, and that would allow launching the first LTE-only devices (here). The question remains open on whether this would also represent lower handset prices for the subscribers, or not. Whatever the path followed it would seem the handset subsidies have the days counted, and as the corner store’ sign states: no credit, no problem.

A. Rodriguez

Wi-Fi services re-invented

Since the first Wi-Fi networks appeared near the year 2000, the technology has been evolving according to the Wi-Fi Alliance and the IEEE standards for 802.11 and its family of protocols. During the last years the most common standards for Wi-Fi has been 802.11b/g, and more recently 802.11n, operating in the 2.4 and 5GHz frequencies and allowing browsing rates of up to 600Mbps. In the near future, the standard 802.11ac should be also popular in the Wi-Fi capable devices, operating in the 5GHz frequency and allowing browsing rates over 1Gbps… and so on, the evolution in the Wi-Fi technology devices is most likely to continue.

Nevertheless, despite the evolution commented, we have seen the services offered by the network operators for Wi-Fi in the last decade were pretty much the same originally offered since day one. The Wi-Fi was typically seen as a technology that allowed the subscribers connecting from their homes and/or offices, without being able to monetize the usage any further than a flat rate, nor providing any interesting services for the subscribers outside these places. Mainly because of the lack of control for the subscribers’ traffic in their homes and offices, due to the original access technology used (e.g. ADSL, cable, fibre, etc.), and because offering Wi-Fi in public areas was not profitable nor feasible in business and technical terms.

Luckily this situation has being changing in the recent years, and let me say it was about time. The network operators and service providers are realizing the potential of the Wi-Fi, and the impact it has in the subscribers’ life. The fact that more than 70% of the total data traffic currently done is accessed over Wi-Fi networks is a solid reason to support it. The hotels, stores, and coffee shops were the first to realize about this opportunity, allowing their customers free Wi-Fi access as a way to attract consumers, among other strategies. The operators also started to be creative in the Wi-Fi offers, making sure solid business opportunities exists for supporting the investment in Wi-Fi access points in public places. The classical example is the open zones, as the ones from BT in the UK, covering high usage density zones and subway stations, etc. with free Wi-Fi for those customers who already have a service contracted with BT, this as a way to reward loyalty, reduce churn, or however you prefer to call it.

Recently, a more creative and innovative strategy is being used by operators like O2, also in the UK, allowing any user (from any company) to use their Wi-Fi network composed by hundreds of access points deployed in the main districts of London. Their business in this last case is directly with the stores and companies in these districts, where O2 offers them a chargeable service to have access points near their stores locations. Attracting customers for them and providing them with the detailed statistics of the usage done by these subscribers in the Wi-Fi networks, as a way to provide targeted commercial campaigns, etc. This service is still improving O2 service image and recruiting churners from other companies… and I would say while still rewarding loyalty (here). Another example could be Google, who proposes another approach in their recent agreement with Starbucks. In this case they are taking over the access provided by AT&T in more than 7000 branches, and replacing it with an incredibly faster Wi-Fi service by increasing the backhaul capacity 10 times, rewarding people for consuming at Starbucks while Google’s image is improved, without mentioning the obvious economic agreement benefits (here).

The Wi-Fi opportunity is not only for increasing revenue from a service provider or an operator point of view, but it can also be used as a way to encourage evolution. The recent example is South Korea, where the government has announced they will expand their current free Wi-Fi network coverage to provide nationwide service in the next 4 years. A Ministry of Science, ICT and Future Planning official said, “Expansion of Wi-Fi areas will ease financial burdens on consumers and help narrow the information gap between people in Seoul and other cities” (here). Examples like this and the deployment seen during the Olympics in London last year, show how the technology, and particularly the Wi-Fi, is becoming a need for the users in today’s connected world.