European carriers are moving away from subsidies which is now gathering pace, as the growing popularity of expensive smartphones makes it less viable for carriers to mask the real cost of the handset.
One by one, the signs point to the decline and perhaps demise of the mobile handset subsidy. Whether it’s Vodafone paying new found attention to the high-end pay-as-you-go market or regulators threatening to let contract customers walk out in the event of a price hike, there are frequent signs that carriers won’t be subsidizing the smartphones they sell you forever.
Now, the operators have complained to Ofcom that “they are likely to review the way they currently subsidise handsets in order to reduce the risk to them if they have to let consumers exit the contract without penalty for any price rise”.
And what’s Ofcom’s response? A resounding “meh”:
“Our provisional view is that any disadvantages arising from changes in the way in that handsets are obtained by consumers would be outweighed by the protection offered by this option. This is on the basis in particular that handset manufacturers and handset/communications services retailers will continue to have a strong incentive to ensure that consumers are offered competitive and attractive deals for handsets.”
In other words, if Ofcom’s proposals go through, we may very well see a change in the way mobile phones are sold in the UK – currently a predominantly post-pay market, but maybe not for much longer.
In practice, this will probably mean that operators start charging a larger upfront fee for the handset in order to offset the risk of the customer quitting, or – as is already the case from where I sit here in Germany – splitting the contract in two, so that one part of the monthly charge is explicitly paying off the handset, and the other representing the service charge.
Either way, the actual cost of the handset would become much more apparent to the customer, making out-of-contract price a much more sensitive issue. Which is where the Nexus 4 comes in. Even less-savvy consumers can currently assess the low Google Play price and realise that they’re paying more than necessary if they get it on contract. This will only accelerate that trend, particularly if the Google-phone pushes down smartphone pricing in the same way the Nexus 7 did for tablets.
Let’s see if Ofcom’s proposals go through. The consultation closes on 14 March, after which Ofcom will reveal the finalised rule-tweaks. Operators will then have three months to change their strategies accordingly, so we could very well be looking at a major shift in the UK mobile market before the end of this year.
What’s taking the place of those subsidies? Leasing and financing plans, such as Vodafone’s Red Hot and Telefonica’s O2 Germany subsidiary has My Handy schemes. According to Informa analyst Francesco Radicati, this makes it easier for operators to cope with the growing popularity of expensive smartphones:
“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 upfront price without subsidizing them; as an added bonus, it makes it easier to market smartphones to consumers on pay-as-you-go.”
Why does this matter? Partly because it spells the end for lengthy contract lock-in periods — something operators have to consider anyway due to new consumer protection laws in countries such as Denmark — but also because it means a major shift in consumers’ perception of smartphone costs.Absorbing handset costs into the associated monthly contract payments creates the illusion of the handsets being cheap or even free. This illusion has been handy in some ways — perhaps the smartphone revolution would not have been possible at scale without it — but ultimately it distorts the market.
Expensive toys don’t really come for free, and pretending that they do doesn’t help anyone. Two-year contract terms should not be the norm. Monthly payments should reflect only the service that the consumer gets in return; nothing more. On top of that, the need to absorb more and more upfront handset costs certainly doesn’t do much for carriers’ ability to invest in their networks. If subsidies really are on their way out, then good riddance to them.