Are people prepared to pay for the next generation of ever-more sophisticated smartphones? The rising costs of smartphones have seen European mobile operators provide an increasing number of financing programs as an alternative to ever-increasing subsidies.
Having said that, it is the challenger operators that have been at the forefront of this development, although incumbents are now also starting to play with this model. Some operators have also introduced financing as a way to differentiate their offerings from lower-priced competitors.
A new study from Informa Telecoms & Media suggests that mobile operators will need to carefully assess whether their market is ready for handset-financing initiatives and, if so, which segments should be targeted.
Interestingly, Spain and Denmark have shown that such programs do not always find subscriber acceptance. There appear to be two factors in play: either the programs were launched softly or rivals have kept up pressure with generous – and large – subsidies.
Subscribers have become used to – and now expect – increasingly more sophisticated handsets as part of their annual contract renewal process, and the operators now need to re-educate subscribers. ‘Keep it simple’ seems to be the maxim here, with simple, transparent and flexible financing programs coupled to a wide range of handsets available to meet a wide range of customer needs.
KPN in the Netherlands has shown that financing programs are well suited to brands aimed at the youth or discount markets. Informa found that KPN began started by offering financing in its youth brand, Hi, and then followed through with a launch for mainstream users.
But, as always, timing is key. Operators have to decide whether they are going to be a pioneer and be first-to-market wait whether to wait for competitors to launch and then gauge the market reaction.
Denmark has seen regulatory pressures force operators to launch handset financing. The regulator has decreed that service-contract lock-in cannot exceed six months. Informa also highlighted international accounting-standards bodies, which may want operators to report terminal and service revenues separately.
Some 30 European operators have launched handset-financing programs in the last five years, as an alternative to the subsidy-led model bundled with service contracts (see fig. 1).
A number of operators have had success in promoting cheaper, often own branded devices (usually less than USD 100), but the demand for premium smartphones has not been diminished, as seen by the popularity of high-end devices, such as Apple’s iPhone and Samsung’s Galaxy SIII.
Of course, operator’s are keen to switch subscribers to post-paid contracts, and the consequent growth of profitable data, which justifies the subsidies use to encourage smartphone uptake.
Fig. 1: Europe, operators offering financing/leasing programs, 3Q12
Fig. 2: Handset-financing timeline
In Denmark, which sees intense price competition, Hutchison Whampoa’s 3 has returned to the subsidy model. Vodafone Spain has also gone back to subsidies for new subscribers in its annual summer promotion; just a few months after launching its leasing program.
But at the end of the day it is all about improving their margins whilst maintaining and developing customer interest. To this end Informa Telecoms & Media’s research shows that the new handset-payment model does deliver better margins and operating cash flows than the subsidy model, with leasing offering the best results.
The new plans appear less sensitive to changes in revenue and cost than the subsidy model, bringing more stability to financial statements. Crucially, though, each plan has a different impact on Profit and Loss and balance sheets, and participating operators need to choose a plan that is in line with their target financial Key Performance Indicators. These new plans could have a big impact on financial results.
Interestingly, the research suggests that the average wholesale price of a smartphone could be nearly four times greater than that of a feature phone in 2012 (see fig. 1).
Fig. 3: Global, average wholesale handset prices, 2012
This study will help you:
• Understand the factors driving operators, retailers and OEMs to introduce financing
• Determine the financial profile of these new models and their impact on operator financial performance
• Recognise best practices among operators that have already introduced the model
• Assess the potential for the introduction of handset financing in new markets