Operators are painfully aware that subsidies are a double-edged sword ‘ often essential to attract customers, but hitting profits at the start of the contract cycle. Their opposition to the tactic, and attempts to lure subscribers in other ways, have been gathering pace, but the consumer base is slow to move. Few carriers, though, have gone as far as France’s disruptive new entrant, Iliad’s Free Mobile, which is taking rival SFR to court, alleging that subsidies are consumer credit in disguise.
Market leader Orange said it was evaluating the reduction of handset subsidies as a way to reduce costs, though it rejected Free’s stand, but others may be more sympathetic ‘ especially after the ironies of the recent quarterly results of AT&T and Verizon, in which a fall in iPhone sales led to an improvement in margins.
Iliad founder Xavier Neil argues that the SFR subsidies amount to ‘usurious loans’ that consumers end up paying back in the form of hidden fees in their contracts. He told CapitalMagazine that those fees can amount to interest rates of 300% to 400% in a 1-2 year contract. Free does not subsidize its devices but has used the prepaid/no-contract model to spark a price war in France with its low cost voice and data tariffs.
But for cellcos clinging to higher value postpaid users, the subsidy habit is hard to break. Spain has recently been a testbed for cutting the cord, but Vodafone Spain is reported to be reversing its recent decision to scrap subsidies. Officially this U-turn is just for a six-week promotion, which will offer subsidized cellphones just four months after Vodafone changed its policy, but it may well become permanent. Rival Telefonica Movistar is expected to respond by offering a 20% reduction in phone bills to users purchasing an unsubsidised handset.
Both cellcos dropped subsidies in the spring, instead offering free financing programs so subscribers can pay in instalments (an approach also on offer at T-Mobile USA), as well as trade-in offers for old handsets.
As highlighted in a recent study by PriceWaterhouseCoopers, prepaid wireless and data bundles are key to growth for cellcos in developed markets, and neither of these lend themselves to subsidy models. ‘The mobile industry has reached a point where the economics of the current subsidy model associated with acquiring new and upgrading existing customers to costly smartphones have become increasingly difficult to sustain,’ said Pierre-Alain Sur, the consultancy’s communications industry leader.
Free Mobile was also the topic of conversation on France Telecom’s earnings call. The operator turned in better than expected first half results, with net income down 9.5% to €1.9bn on revenues down 2% year-on-year to €21.8bn. Ironically, domestic revenues fell less than anticipated because of revenue from the roaming deal with Free, which the French cellcos have been blaming for unleashing a price war and hurting their profits.
FT, which has been criticized by smaller rivals SFR and Bouygues Telecom for agreeing to support Free’s roll-out, insisted it could fight back against the low cost operator, even while pocketing the additional revenue. Free has its own spectrum and roll-out obligations, but in the meantime is supplementing its coverage using the FT agreement. FT Orange said it had lost 615,000 French subscribers to Free in the first quarter of 2012, but had stemmed those losses to 155,000 in the second quarter.
Group CEO St’phane Richard said that the Free roaming deal was important for the additional income it would provide ‘ thought to be about €500m during 2012. He told Les Echos newspaper: ‘We have withstood the shock that constituted the arrival of the fourth operator. At least in its first phase, the impact of Free Mobile is behind us.’