Understanding smartphone leases: carrier contracts are evil, right? (Part 1)

Last week, GigaOM posted an article asking a deceptively simple question: why can’t customers just lease their smartphones? Kansas company Mobile Device Leasing xChange (MDLx) is looking to partner with tier-one American carriers to provide customers a smartphone leasing option. The promise is to connect customers to the latest devices without the need for burdensome contracts, while allowing wireless providers to to reduce what they spend on hardware subsidy.

It’s a very tempting proposition. Recently, I discussed the disappointing FY 2011 losses posted by AT&T and Verizon. It seems upgrading smartphones seems to only be a cash cow business for Apple. From a consumer perspective, it’s becoming unanimous: customers hate signing two year (or in Canada, three year) contracts to obtain affordable smartphones, and they really hate paying early termination fees to upgrade their handset. So is getting rid of long-term contracts and implementing a leasing option a way to ensure both customers and telcos remain happy? Not likely.

Contracts have benefits

While customers hate contracts, it’s important to establish that they serve a few key purposes for the betterment of customers and wireless providers – just hear me out. For one thing, telcos cannot operate a billion dollar enterprise without knowing how many customers they will have one year to the next. Contracts are one way wireless providers are able to accurately forecast their revenue, and have a true snapshot of who their customer base is and where they live. As a result, carriers are able to allocate device demand and upgrade their network technology as required, guaranteeing a consistency of network connectivity in areas where it is most needed.

Contracts also help stabilize customer churn, which – wait for it – can actually be a benefit to consumers. With less customers switching back and forth between providers, administrative costs (credit checks, billing systems and bad debt write offs) are kept down. These are costs that should remain low, as they typically will be passed onto the consumer either by monthly/activation fees or being baked into service plan prices.

Contracts aren’t really the problem

While contracts have their benefits, it’s obvious that customers don’t feel this way. In a free market, customers should have the flexibility to come and go when they encounter poor service or they’re not able to get what they want from their wireless provider, be it a particular device offering, network reception and/or data plan pricing. Contracts restrict that flexibility, and thus limit competition between carriers (which is good for consumers).

But I believe the real issue isn’t contracts. Consumer frustration is caused by the disparity between the length of contracts required for full hardware subsidy and the half-life of the “latest and greatest” smartphone. Let’s use Apple as an example. Within the past three years Apple has launched three different iPhone models: the iPhone 3GS; the iPhone 4; and the iPhone 4S. A Canadian customer that signed a contract in June of 2009 would still to this day not be able to upgrade to the iPhone 4S without paying hefty cancelation fees.

A change is definitely in order, but how can the telcos and smartphone manufacturers transition their revenue model to a ‘contract free’ ecosystem and still effectively operate?

So what about leasing?

It appears as though smartphone leasing offers a middle zone price model for customers while helping them stay on top of smartphone releases. This is good news for customers, but not a likely solution for wireless providers. Currently, MDLx is knocking on the doors of tier-one wireless providers and they’re ‘in talks’, but nothing has been agreed upon. I think it will be a long time before we see this option available to smartphone users for many reasons. Apart from the pure loss of the consistent revenue stream that is a stable base of customers locked into contracts, implementing this program would be a huge undertaking, leaving the burden on the telcos to sort out.

Tomorrow, I’ll outline just how difficult this undertaking would be, by demonstrating how it would create more headaches for carriers, no cost savings for consumers, and line the pockets of MDLx.

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.

  • The problem with leasing cell phones is ”
    the half-life of the “latest and greatest” smartphone”. When you lease a car, there’s an expected value at the end which is a substantial portion of the value of the car giving it strong re-sale value. At the end of leasing a cell phone, the phone has too little value to be very viable as a used item sold at a high enough percentage of the initial retail price to make it actually cheaper to pay for the lease than to either borrow money to buy the phone outright or to take the carrier subsidy.

  • I think people just need to wake up and realize that not everything is free. If you want the latest greatest then you need to pay for it. I for one do not pay contract fees, why? because I don’t like being locked in a contract. Now with that said being Canadian I have been with Rogers Wireless for over 10 years. In those 10 years I have purchased I would say about 10 devices, all of them without a contracts. This means I payed full price for these devices when I stayed with Rogers anyways so why should I have not gotten a discount on 3 of them. I find that even though I would have saved some money I would have felt tied down, also having the ability to threaten to leave a provider gives a consumer so much power. I want that power as well I can afford that power, not everyone can. 

    I love being off contract but it really does not give me anything but the power to threaten to switch carriers (to be honest Rogers is the best in Canada so why would I) and cancel my cell (who cancels their cell)

  • Pingback: Understanding smartphone leases: leasing ain’t easy (Part 2) | UNTETHER.tv()

  • Anonymous

    Hi Caspan,

    Thanks for the post, personally I love it!  I completely AGREE with you- why is it that people assert they deserve everything for free?

    I feel like telcos get the brunt of customer entitlement. When was the last time you heard someone who purchase a macbook for 30-40% more than a toshiba or Dell notebook- complain? I don’t hear my friends walking around saying “you know I pay good money to Apple for products, I have had an iPod since 2001… they should be giving me a FREE iPod with the money I spend on iTunes.” No, they don’t complain, in fact they can’t wait to run out to the Apple store and drop hundreds of dollars on the next latest and greatest gadget- and even though they leave the store ABSOLUTELY BROKE- they are smiling.

    Apple products break and malfunction too (I know, I have Apple products). But Apple has great customer service. They are fabulous at making the pain of a busted iPod or Macbook battery defect become a distance memory- fast! However, people are PAYING A PREMIUM for it! It’s built into that 30-40% competitive markup- Like you said, nothing is free! (Even the Apple Genius Bar that’s “free”- it’s really not.) 

    I think customers think that when they pay their bill at the end of the month it’s all pure profit for the telcos. I mean there are costs associated to billing, customer service, websites for self serve transactions, store fronts, network towers upgrades, commissions to pay to retailers and store reps to sell, advertising to get customers walking through the door, inventory/logistic costs and the margins provided to the hardware manufactures. They have an actual business to run- this costs money.

    Therefore, customers need to think twice about the $50-$75 (let’s say) on their monthly bill- especially when the telco’s subsidize their smartphone to the tune of $400 (in the case of the iPhone on a 3 yr contract). How long does it take for the telcos to get these costs back. We see in the case of Sprint http://bit.ly/zTFNff it won’t be until 2015 until they turn a profit on the iPhone. Yet, their customers will still be whiney and ungrateful for their service and expect freebies. 

    You also bring up a great point about contracts, myself have also been a Rogers customer for nearly 10 years. I on the other hand have been on contracts- so essentially Rogers has been giving back to me for my loyalty. I have no problem signing a contract, I am happy with my service. It may not be as cheap as Wind- but I am happy with my reception & network speed and don’t see the point of jumping ship to save $15-$20 month for patchy service and crappy hardware selection. (Bell and TELUS are not any cheaper- so I stay with the devil I know!)

  • To be honest I think McDonald’s and Mr Rogers screwed the entire industry. You might be sitting their and scratching you head but this is my theory. Before McDonald’s if you went to a restaurant and you did not like the service you just did not go back. People might complain once in a while but it was just not a typical thing you did. McDonald’s I think when introduced to North America changed how people thought about what they deserve or are entitled to when they pay for something. McDonald’s pet the consumer on the head and it worked, but it also had a side effect I believe that people got smart to the game and started to threaten” if I am not treated awesome (like McDonald’s taught me can be done) then I am taking my business elsewhere”. Mr Rogers raised an entire generation of kids too feel like no matter what you are special (
    http://online.wsj.com/public/article/SB118358476840657463.html) these two things combined meant the consumer has become aware.

    We used to care about a business back in the days because a friends from your town ran it or you knew the family that owned that business. The world has changed to the point that you have no idea who gets your money when you pay a bill. For this reason I believe you get people from above that have been told they are special and that they are always right and people turn off that little switch in their head that says “be reasonable and try to understand” like you would if you know the owner or person receiving the money.

    That is a long rant to make a point but its one people have to understand how we act nowadays, we are not the same as our parents or our grandparents. I think a business like Rogers does make a healthy profit but I also feel like I get a great service for that and if I don’t I do have a choice to leave. With no contract I don’t personally feel like I owe Rogers a debt, they did nothing for me other then provide a service I payed for. That does not mean don’t take a deal, it means you need to realize if you cannot afford a phone then you have to find a way to pay for it somehow and sometimes that means giving up something that you might not want to give up. I know from that Rogers makes a profit on a hand set if I buy it out right or through a contract. They might get a device from RIM for $400 and they sell it to a consumer for $600. There is still a profit their, so Rogers makes their $200 from a straight non contract sale that is a profit margin instantly for the company. If Rogers give the phone to me for $199 on a 3 year contract then they lose $200 but they now know they have a guaranteed income form you for 3 years which some times can be worth a lot more.

    Now back to the original post, should we lease a phone? I think it would be a great idea to “rent your phone” till you no longer need it, but I don’t believe there is money in it for the carrier. I say this only because I do not believe that there is a huge market for “second hand phone” to be sold off after they are used in North America (in my opinion), maybe there would be a market one was required but its hard to speculate that. So thanks for raising a good question of do we need to stay the same or do we need to change our thinking?

    PS. That link to the $4000 phone you posted, I have that exact one in the office still as a “wow look how far we have come” talk about piece! It still works if the carriers would still support the frequencies but that is a different rant all together. 

    Here is a link to Martplace site where they investigate the actual issues of Canadian carriers and how they don’t help the consumer enough and they leave us holding the bag. It is a great watch


  • Jeff, you’re spot on. But that’s only one of the problems. Jennifer covers the gamut (including the one you mentioned) in part two:


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