Almost all the mobile operators around the world have offered or currently offer what is called smartphones “subsidies”, 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.
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.
- How Apple Will Benefit From the End of Smartphone Subsidies (dailyfinance.com)
- Verizon VoLTE coming in 2014, but don’t get too excited yet (androidauthority.com)