Understanding smartphone leases: buying is better (Part 3)

Last week, we discussed MDLx’s attempts to create a smartphone leasing market, as a potential solution to long-term consumer contracts and the buckets of money that telcos spend subsidizing hardware. In part one of this series, I explained that contracts aren’t the real issue, and in part two, I described how a smartphone leasing market would likely cost everyone money except for MDLx.

So how do we solve the problem of keeping customers happy with the latest smartphones, without having telcos post losses from high COA/COR (Cost of Acquisition/Cost of Retention) hits? Maybe customers should simply buy their hardware outright.

iWant, iGet

Apple has been selling unlocked iPhones for its last two model releases in most markets. Even with steep iPhone subsidies being dished out by telcos, you’ll always find the longest lines on launch day at Apple retail locations. There are tons of loyal iPhone users that just do not want to be tied to a contract and have no problem paying full price for their iPhone. They’re brand loyal to Apple and consider it a good investment as they trust the product to meet their expectations.

However, unless these contract free customers are happy with their postpaid price plans, they will usually have to sign a term agreement to secure the best monthly value for their postpaid voice and data services. Therefore, most customers typically choose to opt for hardware subsidy when upgrading their hardware, as it seems there is no escaping term agreements.

This is where wireless providers need to start re-evaluating how they treat their customers. If customers are purchasing their hardware outright, they should be able to obtain any postpaid price plan on the menu. If more customers were happy with the value they receive for their monthly payment, they would be more likely to stay with their wireless provider, even without a contract. It’s the value of the service that keeps customers from churning, not the hardware subsidy addiction.

Hardware subsidy savings could be better spent on network upgrades, spectrum auctions, expanding self-serve transaction accessibility, more accurate billing systems, better customer service, and perhaps giving back with the occasional price plan discount to customers. There would be more upfront costs associated to getting customers through the door, but once they’ve arrived, they will stay satisfied.

This has actually beenthe business model implemented by Apple – and its point of differentiation – when competing with Microsoft and other computer manufacturers. Apple customers pay on average 30-40% more for a Mac computer over a Toshiba notebook. But does Toshiba offer their customers a free Genius Bar? Are Toshiba customers able to bring their broken notebook back to a retail location for onsite no-hassle warranty repair? No. Instead, Toshiba customers are provided with 1-800 numbers and are forced to keep original packaging to courier their broken warrantied product to a central repair location.

They do it in Europe!

Wireless providers should recognize that iPhone customers (and likely other high-end smartphone customers) are both willing and able to purchase their (unlocked) hardware outright and reward them with either their choice of term-free postpaid plans, or by implementing hybrid prepaid/postpaid plans like in Europe.

Only in North America do we see such a large base of customers tied to contracts. In Europe, most customers purchase their hardware outright and are connected via prepaid price plans. As of 2010, reports indicated that 62% of UK and 79% of Italian customers are not on contracts and subscribe to prepaid monthly services.

The market for wireless services in Europe is much more competitive than what telcos have to deal with in North America. Even though the US and Canada have government organizations such as the FCC and CRTC that mandate many telecommunication business activities,telcos in Europe have recently been faced with greater pressure from the EU.

Wireless carriers such as Vodafone saw a 19% drop in ARPU (across the business) and T-Mobile a 12% ARPU drop in Germany and 25% ARPU drop in the UK between 2008-2010 when the EU implemented MTRs (mobile termination rates). These rates were put in place to allow customers to move from carrier to carrier without incurring such high roaming charges. The intent was to create a more border free union and help optimize “mobility” across the whole of the EU.

Like North American wireless providers, European wireless providers are taking a hit on ARPU. On top of this, they have to deal with the competitive pressure of servicing contract free customers subscribing to prepaid price plans, who at any time can cross the street.

How do they survive? Mainly because they offer their customers more competitive price plans and embrace a hybrid value model. Euro-telcos encourage customers to lock into postpaid price plans where it counts, but instead of forcing consumer loyalty, incorporate prepaid options for better mobility and less roaming costs.

At the end of the day, European wireless providers have managed to foster a profitable model. It’s only in the North American market that we associate a prepaid model with a low ARPU customer. In Europe, prepaid is where most of the customers fall, including high-end iPhone users. Not only have European wireless carriers like Vodafone, T-Mobile, Orange and Telefonica proven they can turn a profit servicing a prepaid customer segment, but they also have superior network capabilities compared to North American wireless providers. European customers can use their mobile devices while traveling in underground transit systems, and have for years. This service is just now coming to the largest American cities and I don’t see it hitting underground Canadian transit systems in the near future (although, it’s widely known that 4G 700 MHz spectrum has the capabilities to reach underground users, in Europe they have offered 3G underground service for years).

We have learned that smartphone leasing is going to be just as expensive (or more) in the long run compared to our current. Therefore, North American telcos should revisit their pricing models and how they do business with their customers. The life cycle of hardware is changing and so are customer expectations when it comes to being bound to contracts. To combat posting losses due to COR/COA hardware subsidy costs, telcos need to shift their retention efforts towards a customer satisfaction model like we see with corporations like Apple. Apple’s customers are happy to spend more on its products and bring in repeat business; there is no reason why telcos cannot do the same. One way they can do this is dropping contracts, curbing customer behavior from expecting frequent hardware subsidy and providing a service that is so good, their customers will never leave.

About the author

Jennifer Daly

Jennifer has over 4 years experience working in the telecommunications industry, most recently at Rogers liaising with companies such as Best Buy and Apple (and many more) to help successfully launch cable and wireless products. During her tenure she had the opportunity to work alongside top executives who taught her a thing or two about the telco industry. Jennifer is generally always found talking, but really loves talking telco.

  • I would love to see the model change! See customers be treated like we should be, an income and reason for the company’s success!

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