Understanding smartphone leases: leasing ain’t easy (Part 2)

Yesterday, while discussing the Mobile Device Leasing xChange’s (MDLx) recent desire to partner with tier-one American carriers to provide customers a smartphone leasing option, I argued that long term contracts are not the biggest issue for consumers looking to get their hands on the latest devices. Instead, the real problem is the disparity between contract length and the lifecycle of new smartphones. Today, I’ll show how smartphone leasing is not the solution to that problem.

Cell phone leasing is not new to telcos

When the wireless providers first entered the market of wireless technology, cell phones cost upwards of $4,000.00. As a result, wireless providers leased cell phones to mostly business users. It was a means to an end, and yielded less risk than leasing to the consumer market. So when hardware costs decreased why did the wireless providers steer away from a leasing hardware model?

For starters, the value of today’s smartphone depreciates much faster than it did in the past. This is due to a number reasons, but mainly because hardware manufacturers are rolling out significant technological improvements in as little as three months, making phones obsolete faster. This is the key differentiator and why there will always be a leasing market for things such as cars, computers, and printers, as these products cost much more upfront and have a longer amortization value. It is likely wireless providers will not enable a leasing option for smartphones, because they simply depreciate too quickly for it to be a profitable model.

Amortization write offs, like hardware subsidy, costs money. Consequently, any savings experienced in a carrier’s COA/COR (Cost of Acquisition/Cost of Retention) budget lines will simply be absorbed into the depreciation/write-off margins of their balance sheet. The costs remain the same, they’re just falling into a different bucket.

Another caveat to smartphone leasing is that most customers are not likely to buy out their smartphone at the end of the lease agreement. I don’t blame them; unlike cars where depreciation tends to level off after year three, smartphones depreciate at a faster rate each month and are almost worthless in less than three years. As a result, any further investment after one year is a terrible idea.

Ultimately, if a leasing solution is offered, we will start seeing customers trapping themselves into one lease agreement one after another, never getting ahead. In the end, they will be spending MORE on their smartphone, not less. Cost is clearly an issue and one of the reasons why customers opt to sign contracts to receive hardware subsidy in the first place, so this point cannot be overlooked.

Carriers will also end up footing a bigger bill. From what I gather, the leased hardware will still fall on the telcos’ inventory books. So what does this mean? A portion of the money MDLx proposes as a cost saving initiative for COR/COA subsidy would have to properly balance bad debt write offs and depreciated inventory no one wants. And let’s not forget there are going to be a whole bunch of customers that just don’t return their hardware, ever! Taking the above into account, smartphone leasing could end up being a financial mess for both carrier and consumer.

Leasing is a logistics nightmare!

Let’s step away from the balance sheet for a moment. The inventory shift that would have to take place to allocate hardware for purchase and for leasing would be a nightmare for the telecommunications companies in itself! There are multiple sales channels that facilitate getting hardware into the hands of customers, which would now require (at least) twice as many SKU’s to assign product. This is not a small problem. Managing inventory logistics to best meet the demand of their customers surrounding a device launch has always been a challenge for smartphone manufacturers and wireless providers. If customers think getting an iPhone 4S on launch day is difficult now, wait until a leasing program is implemented!

By now, it should be obvious that leasing smartphones is not the turnkey solution to solve the costs associated to the rapidly upgrading technology desired by customers. MDLx might be taking contracts out of the equation but nobody is getting any further ahead from a cost perspective. Telcos are still stuck with costs, customers will end up paying more for their smartphones and MDLx just snagged their piece of the teleco revenue pie!

In my thrilling conclusion to this smartphone leasing saga, I’ll attempt to propose a solution to the contract length/smartphone lifecycle dichotomy.

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.

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