The end of the two year smartphone contract

One of the key jobs consumers hire mobile network operators to perform is financing their new smartphones. Not surprisingly, consumers prefer to pay little or no money down to pick up the handset, given that a top of the range smartphone like the iPhone 5 can cost between £500-£700 (depending on model) if bought unsubisidised from Apple.

Mobile network operators fulfill customers’ desire to spread this cost over time by predominantly selling smartphones on two year contracts, with the monthly fee representing a blend of tariff value and the smartphone financing cost. This arrangement works well for the networks as they can improve their customer churn performance by locking customers into their base for blocks of two years.

However, I think this model is changing, as consumers increasingly balk at the idea of being locked into a particular smartphone, network or tariff plan for two year periods. Instead there is a growing trend for consumers to finance the purchase of their device themselves, without requiring a network operator device subsidy.

Contributing to this trend is iPhone adoption and Apple stores, which do a great job at educating customers to the true cost of an unsubsidised iPhone. Equally, the annual product upgrade cycle for the iPhone (and their is speculation that Apple with increase this to two upgrade cycles per year from 2013) means that customers are looking for more flexibility in their commitments with mobile network operators to enable them the option of upgrading their handsets faster.

Further contributing to this trend is the ever increasing options customers have for selling their current phone for cash, either directly to their mobile network or a third party service such as Mazuma. The cash gained from selling the old phone is then used to partially fund the purchase of the consumer's next unsubsidised smartphone.  Again this trend is especially relevant for iPhone owners, as the iPhone tends to hold its resale value longer than competing phones. It’s less of a risk for a consumer to buy their iPhone outright knowing they will get a good resale price for it if they choose to sell it in a year or two.

Once the consumer is in control of the handset financing, they naturally see no need for the traditional 12 or 24 month tariff contracts. They look instead for more flexible options, usually in the form of 30 day rolling SIM Only tariffs. 

This trend is boding well for O2’s MVNO Giff Gaff, which is attracting a rapidly growing base of savvy consumers who wish to buy data centric tariffs at low prices on a on a month by month commitment basis. Often these customers will have done their maths and calculated they will pay less over two years from buying their handset outright and moving to a Giff Gaff tariff compared with a traditional two year subsidised smartphone plan.

Giff Gaff appears an increasingly smart strategic move by O2, as it offers O2 a hedge against any new MVNO or network operator who tries to disrupt the UK market via eliminating handset subsidies and moving solely to 30 day SIM only plans.

This type of market disruption is exactly the new strategy that T-Mobile USA are pursuing, as announced at the recent Deuteche Telekom investor day. T- Mobile USA will make 30 day SIM Only tariffs (called “Value Plans” in T-Mobile USA marketing parlance) their core tariff portfolio for all customers, and phase out traditional two year tariff contracts.

With regard to devices, T-Mobile USA customers will have three choices. They can either bring their own smartphone to the T-Mobile USA network, they can buy their smartphone at full cost from T-Mobile, or T-Mobile will arrange a financing deal for the smartphone, separate from the tariff plan. 

T-Mobile are hoping that the combined cost to the customer of the smartphone financing plan and the monthly cost of the SIM Only “Value Plans” will be less than the total cost of ownership for the customer than a competitors standard 2 year, subsidised device tariff plan.

The final point worth noting about T-Mobile USA's 2013 strategy  is that they telegraphed an aggressive branding strategy to position themselves as the “uncarrier” in the US market. This means they are going to target a large segment of US consumers dissatisfied with their experience with the big 3 US networks, especially AT&T. 

T-Mobile USA plans to disrupt the big 3 US carriers in 2013 

T-Mobile USA plans to disrupt the big 3 US carriers in 2013 

Phasing out of handset subsidy.

Phasing out of handset subsidy.

T-Mobile USA plan to be the "Uncarrier" of the US market

T-Mobile USA plan to be the "Uncarrier" of the US market

The “uncarrier” positioning is a riff on the “uncola” positioning 7Up lemonade used successfully in the US over many decades to position itself as the key non-cola soft drink choice.

It’s going to be interesting to see how T-Mobile USA gets on with this strategy, but I think its a good one and I won’t be surprised if the approach gets replicated into the UK market in the near future.

If none of the UK networks or MVNOs seek to change the model of how UK handsets are financed, I can see an opening for a new player to look to disrupt this space by offering combined financing and insurance solutions to UK consumers looking to buy new smartphones or tablets

A video capture of the T-Mobile USA strategy is linked below. It’s worth watching for nothing else than to see T-Mobile USA’s new CEO John Legere in action. He seems a bit of a livewire and should make for some good headlines in the 2013 US mobility space.

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