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Innovation

Handset exclusivity deals must satisfy customers, too

Telcos and mobile phone makers stand to gain with region-specific agreements through lower customer churn and advertising costs, but this shouldn't come at expense of customer satisfaction, analysts say.
Written by Kevin Kwang, Contributor on

Deals struck between mobile operators and handset makers to restrict the release of specific phones to certain geographic regions, can help both parties cut costs and lower customer churn. But, such agreements should not negatively impact other customers, analysts urged.

According to Bryan Wang, Asia-Pacific and China associate vice president of connectivity research at Springboard Research, telcos' desire to differentiate themselves from their rivals and attract new customers while retaining existing ones, are primary reasons these service providers enter into such agreements.

Wang observed that by coupling a typical two-year mobile service contract with specific handsets, telcos can attract customers from competitors and lower the churn rate, or the rate at which it loses existing customers.

"This is especially important when customer acquisition cost become more and more expensive, particularly in matured markets," he said in an e-mail to ZDNet Asia. "In some Asia-Pacific markets, customer acquisition cost can be as high as US$200 to US$300 per new subscriber."

The analyst also pointed out that handset makers used to only customize the phone menus for individual operators when 3G services were introduced about five years ago. The introduction of Apple's iPhone, however, "changed the game".

AT&T was the first telco to introduce the iPhone to American consumers and it reaped the benefits of being the only carrier to offer the Apple smartphone device. Last September, ZDNet Asia reported that about 40 percent of the telco's 10 million iPhone customers switched to its service from another carrier. Its churn rate also fell to 1.49 percent, from 1.7 percent in the third quarter of 2007.

According to Wang, AT&T was able to gain a lot of "high-end customers" due to the exclusivity deal the U.S. operator inked with Apple. Since its success, other operators have started to look at exclusively launching certain phone models in selected markets, he added.

His view is reiterated by Ovum's device and platform analyst, Tim Renowden.

In his e-mail reply, Renowden noted that such exclusive distribution deals allow handset makers to share the cost, with the telcos, of marketing and advertising for the launch of the phone, providing a guaranteed channel to market.

Telcos are also always looking for a competitive edge, he said, adding that having exclusive access to "desirable handsets" is a good way of reducing customer churn.

One instance was Singapore-based mobile operator Singapore Telecommunications' (SingTel) exclusive deal with Apple to introduce the iPhone 3G to Singapore consumers in 2008. With the deal, the operator was able to hold the market captive for about a year and sold "tens of thousands" of the smartphone during the period.

The deal only ended late-2009 when local rivals M1 and StarHub were finally able to offer the smartphone to their customers.

When quizzed, SingTel said it entered into these exclusivity deals because it aims to give its customers "the widest choice available to meet their needs".

"Various phones have different value propositions and are positioned differently for different market segments," explained a SingTel spokesperson.

Meanwhile, StarHub is also adopting a similar strategy but with a particular focus on smartphones running Google's Android OS, which is fast gaining momentum according to some market figures.

Ng Long Shyang, StarHub's head of sales and marketing told ZDNet Asia in his e-mail that the carrier this year launched three exclusive Android handsets--Motorola's Milestone and Milestone XT as well as Samsung's Galaxy Beam--in efforts to corner more of the market.

"We packaged these smartphones with our nationwide mobile broadband network reach and no-bill-shock mobile data plans...so [customers] can enjoy content, applications and services without worrying about network congestion or excessive data charges," Ng said.

These agreements will allow StarHub to market and position unique handsets and innovative service features to attract or retain customers, and differentiate itself in a competitive marketplace, he added.

Handset makers ZDNet Asia contacted including Samsung, HTC and Nokia declined to comment for this report.

Exclusivity not always beneficial
However, Ovum's Renowden pointed out that while exclusivity deals might be beneficial to both parties at times, they are "not always advantageous". For instance, most U.S. consumers do not understand the technical details of network compatibility, which often dictate what networks a handset is able to work on, and this could lead to customer confusion and frustration, he noted.

He cited the example of HTC's Evo 4G as a handset that garnered positive reviews by tech blogs and press in general but, because it runs only on WiMax and CMDA networks, its network limitations meant that telcos running other networks were not able to sell this device. As a result, their customer base will feel left out and assume it is because their operators failed to ink a distribution agreement with the handset makers.

Springboard's Wang also noted that telcos would need to put in more resources to grow its product base to offer handset variety to its customers. In some cases, the company might transfer the additional costs for bringing in different handsets to its customers, which would lead to more dissatisfaction, he said.

"[Furthermore], if the phone models [offered] are not premier like the iPhone is, market-leading telcos might find it difficult to manage customers' expectations and satisfaction," he added.

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