The Lab powered by O2 » Are Customers Addicted to Handset Subsidies?

And just like that, T-Mobile lit a rocket under the arses of the USA’s major mobile networks.

Now, the US market is very different from the UK/EU markets; carriers over here are well used to offering monthly and/or SIM only deals. Every mobile operator around the world should echo his customer-centric rallying cry – and the EU’s regulations on number portability help remove the pain of switching.

In my opinion though, the most innovative aspect of T-Mobile’s new plans are the way they completely decouple the cost of a handset from the cost of providing service. No more handset subsidies.

The last time I visited the USA, I was shocked at the number of adverts which proclaimed that you could get an “iPhone for 99¢” or the latest top-tier Android for “only $1″. This is, in Legere’s words “bullshit”. That low upfront cost is made back many times over by an inflated monthly service charge.

In the UK, here’s how we tend to advertise phones. Can you (quickly) work out the total cost of ownership of each plan?

(Source: O2 Website 2013-03-27)

The sum is quite simple: (£monthly * 24) + £phone = Total Cost of Ownership (TCO).

Let’s take a look at the last two plans. Get the phone for £30 or get it for £0. Unsurprisingly, lots of people pick the “free” phone. But how free is it? The two plans are fairly similarly priced, no?

(£47*24) + £30 = £1,158
(£52*24) + £0 = £1,248

The difference between the two plans’ TCO? £90! For exactly the same phone, with exactly the same number of minutes, texts, and data – you pay close to a hundred quid more to get a “free” phone.

If we take a cheaper plan, the “free” phone is even worse.

(£27*24) + £250 = £898 
(£42*24) + £0 = £1,008

That’s a difference of £110 just to get a “free” handset.

It’s true that many people don’t have £250 up front, but taking a “free” phone is the equivalent of taking out a loan at 38% APR. Not as bad as Wonga, but certainly not the cheapest way to do things.

And yet, people go for the phone which looks the cheapest in the short term, rather than the device which will cost them the least money in the long term.

Can We End Subsidies In The UK?

Some European operators have had mixed success in removing subsidies. Spain is an excellent example of this – Telefonica (our sister company) has removed subsidies and seen an increase in subscriber numbers, whereas Vodafone Spain had to reintroduce subsidies after losing customers.

This is a trend which is sweeping Europe.

Could it work in the UK? Would customers be willing to pay up-front for their handsets? Would customers rather take out a loan from their mobile network and pay for the handset separately? Would customers compare prices across networks and simply choose the one which is cheapest today rather than looking at the TCO?

I think moving to removing subsidies is great for consumers. It lowers the price they pay and means that they’re not beholden to an evil operator gouging them for two years. And, if at any point the customer wants the latest phone – they don’t have to go through a complicated upgrade procedure – just slap down the cash.

For the operator, I think it’s also good news. It forces them to concentrate on customer service. They don’t need to extend large loans to the customer, nor do they need to compete on up-front cost. The downside, of course, is that the monthly revenue generated by the customer could be lower.

Crucially, for both, it makes pricing totally transparent.

The above pricing chart looks at iPhone prices. If you want to buy an iPhone directly, without subsidy, it will cost you around £600.

So, the sum for your new phone contract could be:

£600 phone + £12 per month

Certainly cheaper in the long run. But are we just too addicted to the lure of the “free” device?