Why do operators call the difference between the point-of-sale retail price of a handset and its wholesale cost a subsidy? After all, the users are clearly paying for the whole thing. Indeed, it looks more like a covert hire-purchase agreement that avoids all the relevant laws by pretending that all the payments are really for mobile service, not hardware. You can easily tell the difference now that SIM-only contracts are available.
Once you strip out the hidden hardware payments, ARPUs suddenly look a whole lot smaller. Comparisons of the mobile industry with that of the Internet also look less skewed, since you don’t count PC hardware against ISP revenue.
Furthermore, a subsidy implies you get nothing in return. In reality, the operator gets considerable control over the handset design and distribution, enabling them to cut off escape routes round operator toll gates, such as Bluetooth transfer of pictures.
Perhaps many operators are really primarily retailers and finance companies, and the network is an unfortunate capital-draining side business? But then again, how would we ever know…
Posted by Martin Geddes at 01:38 PMTrackBack URL for this entry:
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The word "subsidy" came in many years ago when Mobile operators started to pay service providers and resellers for their distribution activities. By setting up a mixture of distribution fees and lease/purchase handset financing, involving the telco, SP/reseller and the end-user, the overall delivery chain was strengthened, especially for subscriptions. In case of pre-paid customers one knever knows whether the actual use warrants a certain level of up-front subsidy. Some resellers just sold the prepaid handsets as single transactions, received their fee and needed never to be engaged again, leaving the customer relation -if any- to the telco. This model is still with us today, with low margins and high competition..
In addition nowadays, so-called "SIM-only" offers from Telco's do without such schemes, especially in case of SP/reseller bypass via the Internet. Dutch KPN (where I worked for many years) is now indicating that they want to lower the level of handset subsidy, preferably to zero. But if the competitors do not follow this example soon, I do not see how they'll manage in the long run.
And just on this money-draining business of networks: never forget the high mobile to fixed termination fees, the kick-back mechanisms in place etc... Mobile Telco's know too well not to slay these "chickens laying golden eggs" and regulators can not intervene! Fixed Voice telco's have no such freedom: the've PC-based Skype to fear (your favourite), but also Cable companies adding fixed voice at a very low, almost "free" subscription basis. And handsets are not bundled, so network bundling (triple/multiple play) is the only countermove on fixed voice commoditisation. Some people prophesize that network bundling will never compensate for fixed voice commodisation, but see salvation in the addition of media business. We'll know in a few years time who's right...