Tuesday, January 8, 2013

Market Impact of Full Shift to "Unsubsidized Phones" is Unclear

Nobody really knows what would happen if virtually all the U.S. mobile service providers  abandoned device subsidies, Not only are changes of consumer behavior highly likely, but there also would be average revenue per user impact as well.

Executives might prefer not to incur the hit to operating revenue the subsidies represent.

But huge potential changes in consumer behavior, and rates of innovation, could happen, and not all the changes would be positive for service providers.

Handset prices might have to shift towards less-expensive models, while consumers likely also would slow the rate at which they replaced their devices.

Aside from the implications for handset prices, average revenue per user would drop. So executives will have to do analysis of what lower gross revenue would mean, even if the cost of device subsidies is partially or totally eliminated. And it isn’t so clear that subsidy costs could be avoided altogether.

Much would depend on how consumers and handset suppliers reacted to the changes. It is possible the value of exclusive device deals would diminish. It is possible consumers would “trade down” in terms of handsets, slow rates of replacement or switch to prepaid plans that would still be cheaper than the “no-subsidy” postpaid plans.

In other words, there would be a possibility of unforeseen changes in consumer behavior that would not be helpful to the service providers, even if they assume the switch to “no subsidies” would be beneficial.

Up to this point, it has not made much economic sense for a customer to buy an unlocked phone and then buy postpaid service from a leading service provider, since there is in fact no discount for customers who wish to do so.  

T-Mobile USA already has decided to end device subsidies, but in a nuanced way. It offers installment payment plans, and has found more of its customers shifting to “buy your own device” or “bring your own device” retail plans, as a result.

T-Mobile USA says it plans to end all device subsidies in 2013, after finding that perhaps 80 percent of its customers choose a "bring your own device" or "buy your own phone" plan anyway.

To ease the "sticker shock," T-Mobile USA offers installment plans. But some would note that the total price of the service plus the installment plan does not actually save users money over buying a traditional plan from another carrier.

T-Mobile USA apparently has seen about 1.9 million iPhone users bring their own devices to T-Mobile USA, growing by 100,000 a month. That is a somewhat special case, as such users probably originally were AT&T customers, probably did get subsidized phones, and then moved over to T-Mobile USA after their AT&T contracts expired.

It isn’t quite so clear how many people are opting to pay full retail price for an iPhone, and that is the real issue.

Also, much of T-Mobile USA’s customer base is oriented towards the “value” end of the business, namely prepaid, where subsidies traditionally have not played a role, in any case.

But some would argue that T-Mobile USA hasn't really ended contracts, either, even for customers who bring their own devices, or opt to buy new devices. Nor have the company financial results clear, in terms of the impact of the new strategy.

Until we get a firmer sense of how T-Mobile USA is faring, financially, it is highly unlikely AT&T, Verizon or Sprint would risk financial damage by shifting sharply to a “no subsidies” model.

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