How Big a Problem are Smart Phone Device Subsidies?

Device subsidies are an issue for mobile service providers, as they are a drag on earnings, but device subsidies might not as big a problem as being viewed as a commodity provider of dumb pipe access.

Some argue mobile service providers would be better off not subsidizing devices at all. Others might agree in principle, but note that the device subsidies reduce a key barrier to end user adoption of more-capable devices that drive mobile Internet access revenue.

So mobile service providers might be said to face a “lesser of two evils” problem. Not subsidizing smart phones would improve operating results, but at the risk of slower adoption of mobile devices benefiting from mobile Internet access plans that now drive revenue growth.

And that is why, problem or not, mobile service providers face significant challenges getting “out of the device subsidy business.” Device subsidies or installment plans are a problem, but probably a lesser problem than jeopardizing demand for mobile Internet access.

There are other imponderables as well. Historically, it has been very difficult to create a positive brand image for a service provider. Consider, by way of comparison, the intense or at least significant importance of brand affiliation for personal care products, clothing, automobiles or other “personal” products.

You might argue that the smart phone is the first tangible expression, in the history of the telecommunications business, of an attribute of the communications experience that is truly “personal.” The problem is that the affiliation still is with a device, not with the actual “access service” or the provider of the access service, necessarily.

In getting out of the device business, service providers might forfeit even more distinctiveness in the market, shift end user affiliation even further in the direction of emotional bonding with the device, not the access provider brand, and have less leverage over consumer accounts.

So, yes, the cost of financing handsets is a “problem,” but it might well be less a problem than becoming more of a dumb pipe supplier of access than mobile service providers already face.

“Mobile carriers are subsidizing handsets, but not reaping the return on investment as over the top service providers take revenue share,” says ABI Research. That is true, but is true of the business, in some parts of the world, not a particular function of the device subsidies or installment plans.

That might be true even if a device subsidy is the single largest cost for a carrier over the lifetime of a subscriber’s contract. ABI Research argues that 68 percent of the revenue derived from a typical 24 month contract has to cover the cost of the device.

Some might quibble with the precise figure, but the point is that a device subsidy or installment plan does represent a significant part of the cost of customer account over a two-year period.

Some might argue the mobile cost of service is high “because of the subsidies.” Others might disagree. The posted retail prices in any country are hard to compare directly. What makes more sense is the affordability or cost of mobile service in terms of local purchasing power or income.

In fact, some might argue the price of mobile service in the United States is among the lowest in the world, expressed as a percent of personal income.

One might argue that is a good reason for improving the transparency of the device purchase. But one might also argue that mobile service providers already are doing so, creating installment plans that separate device acquisition from recurring service cost, for example.