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.