Market conditions dictate viability of carrier subsidies

Carrier subsidies will continue to play an important role in promoting the sale of handsets, particularly in Asia-Pacific, but it is not suitable for all markets and there are other factors that would compel consumers to purchase a mobile device.

According to Nicole McCormick, senior analyst of telco strategy at Ovum, handset subsidies given by operators are still common in some Asian markets as it helps increase the affordability of the device and can be used for market differentiation.

Chinese telcos, for example, are aggressively subsidizing 3G smartphones while introducing low-end handsets at the same time, she noted.

Gartner's managing vice president, Bertrand Bidaud, also pointed out that carrier subsidies represent the main selling point usually in mature markets where the majority of consumers opt for postpaid subscription plans.

Conversely, for countries in which most consumers favor prepaid mobile packages, Bidaud added that subsidies tend not to be "a key element".

That said, McCormick noted that subsidies add more pressure to profit margins so in terms of a long-term outlook, she expects more operators in developed markets to rely less heavily on this strategy.

Already, there are early evidence globally that telcos are moving away from absorbing part of the device cost, with some launching handset-leasing options while others are heavily promoting SIM-only, one-month service packages that come without a handset, the Ovum analyst said.

McCormick explained: "Leasing options convert a large upfront cost into a more palatable ongoing charge, while the SIM-only options provide a low-cost alternative for those who wish to continue using their current handset or want to purchase their own device through an alternative retail channel."

Subsidized devices typically are sold with service contacts that tie the customer to the operator for two years.

Lure of value for money
Singapore Telecommunications (SingTel) weighed in on the subject, saying that price and subsidies are important considerations for Singaporean consumers seeking value-for-money for their device purchases.

A company spokesperson said: "The objective of subsidies is to lower the upfront cost of ownership and make it more affordable for all our customers, [and] the level of subsidies across all devices are similar. Of course, for every subsidized device, the carrier must ensure there is a positive business case to justify the subsidies."

The carrier subsidy model was recently in the spotlight, after mobile makers and telcos in South Korea were fined by the country's Fair Trade Commission (FTC) for "price rigging and commercial fraud", according to a March report by Korean news wire, Yonhap News Agency. The companies in question were Samsung Electronics, LG Electronics, Pantech, SK Telecom, KT, and LG Uplus.

The Korean FTC said in the report that the companies were found to have "colluded to inflate the prices of cell phones and then advertise they were offering [the devices to customers as] considerable incentives". This tricked consumers into believing they were getting a bargain for the phones when they would have paid more than they should, the report noted.

Commenting on this, McCormick said South Korea's operator-handset manufacturing retail model was due to be overhauled starting this May.

With the changes, handset vendors would not have to sell their handsets--which usually come with a subsidy--exclusively to operators. Instead, they would have the option to work with other channel partners such as big retail outlets, she said.

"We will have to wait to see what the ramifications of these moves are on carrier subsidies in the market," she surmised.

Other factors also play a part
Beyond subsidies, the SingTel spokesperson added that other important criteria people look out for include device features and capabilities as well as handset branding. The operator's reputation in terms of its network coverage and reliability were other pull factors, he said.

In terms of device features, he identified screen quality, memory size, processor speed, and camera specifications as areas that had become important criteria as more consumers used smartphones to access multimedia content such as videos and games on the move.

Bidaud concurred, noting that the perceived quality of the handset plays an important marketing role, too.

The Gartner analyst said: "If the handset is desirable, then the users will want it.

"The subsidy is usually used by operators to 'close a deal' and get the user committed for two years. Even when subsidies exist, though, the amount depends on the device cost and value of the handset in the eyes of the user."