Why telcos love handset subsidies

Carriers have been bemoaning the cost of providing handset subsidies, yet it's the easiest way of securing customers for another couple of years.
Written by Phil Dobbie, Contributor

Subsidised handsets have been the mobile operators' way of luring more people onto smartphone devices. It's the same trick used in the early days of broadband. During the land grab of the early noughties, if an internet service provider (ISP) didn't offer free modems, it simply didn't get the business.

Whilst fixed broadband has moved on, a new report from the OECD suggests that such subsidies remain essential in the mobile space. In Spain, for example, Telefonica and Vodafone lost 1.5 million customers last year, when they dropped handset subsidies. Most went to Orange, who hung on to its subsidies. It's a cautionary tale for mobile operators who think the market has matured and that it's time to move on from this land-grab mentality.

Australia has embraced the subsidisation ideal more than most over the last couple of years, with Telstra and Optus using free handsets to grab dissatisfied Vodafone customers. The extent of the subsidy is easy to see; Telstra has cut back on handset subsidies, yet even now, a customer pays just AU$21 per month extra on a low-end plan to get a 16GB iPhone 5. That's AU$504 plus interest, versus AU$799 to buy the phone outright.

The OECD report shows that Australia generally has the lowest bundled plans, thanks, in part, to heavier handset subsidies. Yet, when the two-year plan is graphed out, it's easy to see that the impact of subsidy is marginal. It's largely psychological.

Image: Phil Dobbie/ZDNet

In fact, the savvy consumer would unbundle and buy outright. On today's prices, an AU$800 loan at 15 percent per annum interest would buy you an iPhone 5 and cost AU$38.79 per month over two years (even less if you redraw on your mortgage). An Amaysim unlimited plan costs AU$39.90 per month. Put the two together, and you have a phone, with unlimited talk and text, plus 4GB of data, for just AU$78.69. To get anywhere near with an Optus (with just 3GB of data), you'd spend AU$23 extra per month, even though you are using exactly the same network.

Yet, the perception of a free phone will more often than not win the business. Britain and Australia have two of the highest rates of smartphone penetration, most likely because carriers have been offering devices with no upfront cost .

Does anyone win through handset giveaways? Yes, of course. The carriers. They can moan that they are subsidising the likes of Apple, which offer little in the way of margin for telcos. But the truth is, consumers will look more closely at the upfront giveaway than they will at the plan cost that goes with it. Without such subsidies, the consumer's eye will be keenly focused on the price of the service — just as they are with corporate plans. Fortunately for the carriers, consumers are much more easily swayed by instant gratification.

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