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Handset Subsidies - Legacy Overhead or Marketing Essential?

There is an ongoing and fierce debate as to whether handset demand is driven by handsets and the attractiveness of the features within them, or operator subsidies and length of contract. It is a complex relationship with many variables playing a part. Handset subsidies are perceived to have a negative impact on profits and EBITDA and encourage churn. As a result, MNOs increasingly want to operate in markets without subsidies and many regulators around the world want markets that are more transparent for consumers. Subsidies are not just a cost to operators though. They also provide the network operator with a much higher degree of control in the market and lead directly to higher revenue levels, which more than offset the costs incurred. Loss of revenues and market control can lead to market stagnation, as customers fail to upgrade their handsets and consequently fail to begin using the new data services that operators are depending on to achieve areas of growth, while voice prices continue to erode due to both regulatory and competition effects.

Are subsidies a bad thing, or an essential element in MNOs' armouries, enabling them to develop the market and new services effectively for the eventual benefit of the consumer? Subsidies definitely reduce transparency, but is more transparency in the best interest of the MNO or the consumer? Can they be removed in any event or will they inevitably re-appear in another form if regulated out of the market?

This report looks at the case for and against subsidies, examines some markets where subsidies have recently been implemented and those where subsidies are being reduced and also looks at the impact that subsidies, and the lack of them, have had on the introduction of new handsets, such as the iPhone. Conclusions are drawn about the efficacy and relevance of subsidies and recommendations made for MNOs facing the question of whether to continue with or to remove this mechanism.

Price: EUR 2,500.00 / GBP 2,400.00

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Table of Contents


1
OVERVIEW
1
2
INTRODUCTION
2
2.1
Background to the Report
2
2.2
Report Content
4
2.3
Currency and Conversions
5
3
MARKET CONTEXT
6
3.1
Introduction
6
3.2
Handset Subsidies and Tariffs
6
3.2.1
Customer Satisfaction with Handsets
6
3.2.2
Operator Perspectives on Handset Subsidies
7
3.2.3
Cross-subsidisation
8
3.3
Why Subsidies are Implemented
8
3.4
The Case Against Subsidies
9
3.4.1
Introduction
9
3.4.2
Subscriber Acquisition Costs (SACs)
9
3.4.3
EBITDA Margins
10
3.4.4
Churn
11
3.4.5
KPI Overview
13
3.5
The Case for Subsidies
14
3.5.1
Handset Developments
14
3.5.2
Exclusive Handsets and Subsidies - The iPhone Case
15
3.6
The Economics of Handset Subsidy
17
3.6.1
The Profitability of Subsidies
17
3.6.2
Allocating Costs and Customer Lifetime Value
19
4
LIMITING SUBSIDIES
21
4.1
Introduction
21
4.2
Providing a 'Customer Experience'
21
4.3
SIM-only Offerings
22
4.4
The Role of the Regulator
23
4.5
Extended Service Contracts
24
5
SUBSIDY REMOVAL CONSEQUENCES
25
5.1
Separation of Handsets and Services
25
5.2
Loss of Control of the Customer
25
5.3
Handset Demand Reduction
26
5.4
Independent Dealer Channel Challenges
26
6
COUNTRY PROFILES
27
6.1
Introduction
27
6.2
Japan
27
6.2.1
General
27
6.2.2
NTT DoCoMo
28
6.2.3
SoftBank
29
6.2.4
KDDI
30
6.2.5
Effects of Decreasing Subsidies
30
6.3
Finland
31
6.4
South Korea
32
6.5
Italy
33
6.5.1
General
33
6.5.2
Vodafone Italy 'Telefono Facile'
34
7
CONCLUSIONS
37
8
RECOMMENDATIONS FOR MNOS
40