Senior Consultant, IDATE DigiWorld
Handset value chain shake up – menace or salvation for operators?
Basile Carle, lead device expert at IDATE, raises the question he addressed in his latest study: “Smartphones as we know them today – beginning with the iPhone in 2007 – have clearly enabled operators to better monetize connectivity and therefore helped to generate a return on their earlier investments in 3G network rollouts. Paradoxically they have also accelerated the transfer of a portion of telcos’ share of the value chain over to newcomers, namely handset suppliers and over-the-top (OTT) – or online – vendors. The time has come to revisit the handset subsidies question! Why should operators continue to finance a device – i.e. the smartphone – when other players capitalize more and more on that device: players who threaten to turn operators into mere providers of connectivity, dumb pipes which, although essential are in danger of becoming a commodity?”
From feature phone to Smartphone 2.0 – changes in the value chain
The advent of the smartphone 2.0 triggered a shift in the value chain and a change in business models that forced operators to rethink the way they finance mobile handsets, and this within an increasingly competitive marketplace.
The changing value chain of smartphone distribution
Source: IDATE, Rethinking handset subsidies, December 2015
As competition becomes increasingly fierce, operators have altered their approach to subsidies, largely in an attempt to streamline their sales and marketing investments, especially as it became clearly that, more and more, handset suppliers were emerging as their competitors. This resulted in different strategies from operators, one consisting in rethinking subsidies themselves the other consisting in proposing alternatives financing solution in a SIM only and commitment free world.
When thinking again on subsidies themselves, a distinction needs to be made between subsidies whose purpose is to attract new subscribers, and those used to keep existing customers. Some operators subsidise new customers’ handsets as heavily as those of existing customers when their contract is up for renewal.
Other operators, however, are focused either on keeping old customers or on acquiring new ones. The decision will often vary depending on their market share. A leading operator will tend to be more concerned with keeping existing customers, whereas a challenger will probably take a more aggressive approach to attracting new customers than to keeping its existing ones.
If some operators have decided to continue to partially subsidise their customers’ handsets in exchange for a contractual commitment, most have also introduced SIM-only plans that separate the flat monthly fee from the cost of the handset, and so freeing customers of having to sign up for a minimum contract length. While users can keep their old handset, it nevertheless remains important for operators that new customers who sign up for these plans own a handset whose features enable them to take advantage of all of the functions supplied by the network, whether 4G, carrier aggregation, VoLTE, etc. … Hence the importance of proposing new financing solutions
Impacts of new handset subsidies’ plans
This new approaches in device subsidies has also had an impact on the devices themselves. Suppliers of high-end handsets initially suffered a drop in sales as customers were put off by the price of their products once subsidies were removed. But these companies have adapted to the new situation by introducing their own financing solutions.
By the same token, this shift has enabled the emergence of new players in the marketplace. Companies that present themselves as local – i.e. national brands that created localised versions of what are often Chinese products – have forged themselves a position in the low-end handset segment, and are working to build up the market for handsets sold in retail outlets rather than by operators’ themselves.
Meanwhile, operators have been gradually going back to developing their own brand of handset. Contrary to the first wave of phones that carried operators’ brands, the goal here is less to sell handsets that are more or less locked into the operator’s own services than to get a better handle on costs. These branded products enable operators to earn a slightly higher margin than they do selling OEM products. So their appeal applies as much to subsidised solutions as unsubsidised ones.
By the time 5G is deployed, the (distant) prospect of seeing handsets become active components in the network’s operation – e.g. for relaying signals to the edge of the cell or to a dead zone – could trigger another rethink of handset financing. As the devices become part of the network’s equipment, it could once again be in operators’ interest to help finance them.
Get more insights on changing handset value chain and impacts for operators and manufacturers, through our dedicated market report