Feature Article

March 28, 2012

Will T-Mobile USA Shift Device Subsidy Practices?

Beginning April 4, 2012, T-Mobile USA will increase the price of its “Premium” 5 GByte “Promotional” plan and “Ultra” 10 GByte “Promotional Bundles Classic” data features by $5 per month. The currently available Classic 5 GByte and 10 GByte promotional bundles will be replaced with new plans and a $5 monthly rate increase. The price change probably isn't the most important aspect of the deal, though.

More important is a subtle shift in the direction of “encouraging” users to pay full price for their smart phones, a development that is fraught with risk for T-Mobile USA. In U.S. markets, expensive smart phones have gained traction largely because their cost has been subsidized by service providers who compensate by requiring service contracts.

One way of posing the question is to ask what Apple iPhone penetration might now be if users, all along, had to pay $600 to buy an iPhone. Classic economic theory indicates that less gets sold when price goes higher. Is there any reason iPhones would be different if typical acquisition prices were $600, instead of “$200 plus contract?”

It isn’t clear that smart phone adoption would have accelerated, in the absence of the subsidies. And smart phones are important for a number of reasons, including the higher average revenue and lower churn that tends to be associated with smart phone accounts.

But subsidies impose a real operating cost for service providers. In fact, European mobile service providers in several European markets are looking to reduce the high level of subsidies they currently offer to new and upgrading smart phone customers.

In Spain, Vodafone appears to be ending the practice of subsidizing smart phones for new customers, following a similar announcement by market-leader Movistar (Telefonica) earlier in the month.

Vodafone Spain plans to offer free finance programs for the purchase of new handsets and introduce a scheme to buy back old phones from upgrading customers.

Operating costs are the clear reason for clipping the subsidies. When a service provider subsidizes a $600 device to the tune of perhaps $400, it essentially is making a loan to the subscriber until the full amount is recovered.

What remains to be seen is the impact of subsidy changes on the rate of innovation in handsets and applications, if, as some would suspect, the end of subsidies slows down the rate at which consumers replace their handsets, and might reduce the rate at which they buy some of the more-powerful and latest devices.

There is some evidence to that effect. And that, perhaps, is the danger T-Mobile USA faces. It might inadvertently further slow adoption of smart phones by its customers. But watch for additional, incremental moves by a wide range of service providers. As much as they like additional mobile broadband revenues, they “hate” the cost of subsidies. The issue is whether service providers really can avoid them. 

Edited by Jennifer Russell

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