Cellcos still fighting device subsidies

Rethink
Cellcos' love-hate relationship with handset subsidies continues, with rising numbers of operators trying to tread the delicate balance between reducing these upfront costs, without driving away customers.
 
The latest major operator to consider a drastic cut in subsidies is China Unicom, which – like many iPhone carriers, in particular – has seen its profits hit by the payments.
 
According to industry sources, Unicom is considering axing subsidies on its range of 1,000 yuan (€127) smartphones, from 50% down to 20%-30%. But when chasing high value, postpaid users - as Unicom is, with its advantage of supporting HSPA and its big device ecosystem – it is dangerous to be too drastic on subsidies.
 
Recently, for instance, Spanish operators scrapped subsidies, but Vodafone was reported last month to be reversing its policy, while Telefonica Movistar was offering a 20% reduction in phone bills to users purchasing an unsubsidized handset.
 
Analysts at Strategy Analytics have released an analysis of the Spanish experiment, in which Yoigo also participated (but not Orange, which has already been reducing its subsidies compared to those of its competitors).
 
Movistar started removing subsidies on smartphones in April, increasing average handset prices by more than €100, and Vodafone and Yoigo followed in May. As a result, Movistar, as first mover, saw an annual fall of 42% in gross connection volumes, according to the analysts, while Vodafone saw a 36% reduction in 2Q. And since May, smartphone prices have been falling somewhat, suggesting that the carriers are compromising on their resolve.
 
Operators are helped by the rise of prepaid contracts, even in developed markets – in turn boosted by the availability of high profile devices like iPhones on these plans, rather than the low end cellphones which used to be associated with pay-as-you-go.
 
That is helping carriers with a high proportion of prepaid customers to increase ARPU while not taking on more subsidies. They also, of course, benefit when their postpaid-led rivals experiment with cutting subsidies or increasing the price of upgrades.
 
 
Both tactics have been adopted in certain areas by Verizon and AT&T, benefiting T-Mobile USA in recent months. The fourth cellco has suffered on the postpaid side by its decision to slash subsidies in order to counter falling profits, but now it is seeing its larger rivals making some similar moves, narrowing the gap in handset prices.
 
“We seem to be entering a new phase in the US market,” Leon Cappaert of KBC Asset Management told Bloomberg. “Margin pressure in the sector is diminishing significantly, and that may mean a positive surprise on the mar-gins for T-Mobile.”
 
To reduce handset costs, AT&T this year doubled the upgrade fee for existing customers who want a new phone and lengthened the time users need to wait before they can receive subsidies. Verizon, meanwhile has imposed a $30 (€24) levy on all customers buying new smartphones.
 
But T-Mobile's costs from handset subsidies fell by 42% in the first quarter to $310 million after the company rolled out a low-subsidy tariff structure, including financing options under which customers can pay in installments.

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