Are Handset Subsidies Good for Consumers?

Are handset subsidies “good” or “bad” for consumers who choose to buy service plans featuring bundled devices? A study by the Organization for Economic Cooperation and Development tries to answer the question.

Perhaps not surprisingly, the answers are nuanced.

In some cases, where one or more operators allow for the possibility of purchasing the smart phone device independently from a bundle, there is a higher total cost for consumers over three years.

For those countries where both bundled and “bring your own device” options exist, such as in France or the United States, the report concludes that the bundled option (with discounted smartphone) was, on average, between $10 and $20 a month more expensive than the BYOD option.

“This is not unexpected,”  a new OECD report shows. When service providers bundle or subsidize a device over time, they essentially are loaning the customer money. The difference in cost over three years essentially represents the cost of credit.

Practices that promote transparency, such as the use of handset purchase by unbundled monthly instalments, can have a positive impact on both consumers and the ecosystem that exists around smartphones, the report suggests.

This report also concludes that, in broad terms, service pricing is only slightly affected by the presence of bundled discounts for popular smart phones.

But the report also notes there are other forms of consumer benefit, irrespective of the possibly higher cost of bundled devices, over three years.

Bundled devices are beneficial, and promote smart phone use, by removing high upfront payments that are a deterrent.

Consumer lock-in is not an issue when regulatory authorities enforce maximum periods for contracts after which customers are entitled to have their handsets “unlocked”, do not permit devices to be locked or ensure there are procedures for early termination of service contracts.

The report does not that there is some evidence that when one mobile service provider provides subsidized devices, and others do not, the non-bundling carriers suffer marketplace damange.

In Spain, Telefonica and Vodafone, the two operators with the largest market share, decided to remove handset subsidies in February 2012 (Cinco Dias, 2012).This action was not followed by Orange (Spain) which gained market share from Telefonica and Vodafone during the first half of that year.

Possibly as a result of this experience Vodafone reintroduced what it described as a short term special offer, which included the price of a handset, at the end of July 2012.