Device subsidies are an issue for mobile service providers, as they are a drag on earnings, but device subsidies might not be as big a problem as being viewed as a commodity provider of dumb pipe access.
Some argue mobile service providers would be better off not subsidizing devices at all. Others might agree in principle, but note that the device subsidies reduce a key barrier to end-user adoption of more capable devices that drive mobile Internet access revenue.
So mobile service providers might be said to face a “lesser of two evils” problem. Not subsidizing smartphones would improve operating results, but at the risk of slower adoption of mobile devices benefiting from mobile Internet access plans that now drive revenue growth.
And that is why, problem or not, mobile service providers face significant challenges getting “out of the device subsidy business.” Device subsidies or installment plans are a problem, but probably a lesser problem than jeopardizing demand for mobile Internet access.
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There are other imponderables as well. Historically, it has been very difficult to create a positive brand image for a service provider. Consider, by way of comparison, the intense or at least significant importance of brand affiliation for personal care products, clothing, automobiles or other “personal” products.
You might argue that the smartphone is the first tangible expression, in the history of the telecommunications business, of an attribute of the communications experience that is truly “personal.” The problem is that the affiliation still is with a device, not with the actual “access service” or the provider of the access service, necessarily.
In getting out of the device business, service providers might forfeit even more distinctiveness in the market, shift end user affiliation even further in the direction of emotional bonding with the device, not the access provider brand, and have less leverage over consumer accounts.
So, yes, the cost of financing handsets is a “problem,” but it might well be less a problem than becoming more of a dumb pipe supplier of access than mobile service providers already face.
“Mobile carriers are subsidizing handsets, but not reaping the return on investment as over the top service providers take revenue share,” says ABI Research. That is true, but is true of the business, in some parts of the world, not a particular function of the device subsidies or installment plans.
That might be true even if a device subsidy is the single largest cost for a carrier over the lifetime of a subscriber’s contract. ABI Research argues that 68 percent of the revenue derived from a typical 24-month contract has to cover the cost of the device.
Some might quibble with the precise figure, but the point is that a device subsidy or installment plan does represent a significant part of the cost of customer account over a two-year period.
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