Headline |
|
Contracts Are The Barrier To Adoption
October 21, 2009
Carriers are big fans of subsidies for cellular phones. Yes, they complain about the tremendous costs subsidies inflict on their bottom line, but their attachment to this model is largely rooted on two causes:
-
Cheap phones attract new subscribers. Many consumers just would not pay $200 - $500 for a phone. But spread those payments over two years, and everyone will shove a phone in their pocket.
Subsidies offer control. And we all know that control is a treasured and waning commodity at telcos. By subsidizing the phone, they can control the features and functionality installed therein.
-
Subsidies made a whole lot of sense in 1995, when lower rate plans were democratizing mobile phone use, there were few second-hand phones available, and the best carrier strategy was a land-grab for new subscribers. If customers had been asked to shoulder the entire cost of the mobile phone, then pay a lesser monthly subscription rate, sales would have been much slower. So the carriers turned to a subsidy model, reducing the ‘barrier to adoption’ to $60 or less.
But the subsidy models that made so much sense in the late 90s are a terrible fit for an era of 90% cellular phone penetration. Numerous factors have changed. New customers no longer mainly arrive to buy their very first phone, but in fact must be churned from a competing carrier. Newly acquired accounts may already have a cell phone, and probably have a few older models tucked in a drawer in their home, too. Secondary markets exist for used phones, and some customers go direct to the phone makers for specific handsets. But the biggest change is that while the value a customer gets from a subsidy has gone down in relative terms, the corresponding annoyance the customers feel about the 2-year contractual lock-in has grown. What I’m getting at seems to be an undeniable truth: some customers would surely prefer the option to bring their own phone, and get cheaper service with low commitment.
If that is the case, then the subsidies, which in the past spurred this industry to greater heights, are now stifling the market they created. By forcing everyone to take a subsidy and lock in a contract, carriers are scaring off some business. Ironically, the very tool that fueled industry growth through the first 15 years, now presents as big a barrier to adoption as it set out to overcome. Today, with market penetration already high, obligatory contracts and commitment-phobia are keeping some customers from experimenting with new carriers, and new services. Isn’t it time that the major carriers turned to a different tool, rather than beating customers over the head with the same hammer that fit the job in 1995?
Mobile broadband services make the most obvious case. Why have we not seen greater adoption of these subscriptions in laptops? Is it the cost of a $200 modem, or rather is it the fact that few want to commit to using $60/month of data service for the next two years? Which of those two barriers is harming growth more? Are carriers putting equal resources into overcoming each? Of course not, they pull out the hammer and start nailing subsidies onto the hardware. Why not, instead, sell the modem at cost (purchased in volume), but include connection manager software that includes day-pass options, lower throughput options, month-to-month options, and has no commitments? Market penetration, sales, and overall data use would be sure to grow.
The same argument applies to phones. In this case, though, most prospective subscribers already have one. I recently ended my 24 month obligation to my carrier, but I’m happy to remain loyal. With 5 lines in a family plan, and a bunch of rollover minutes, I have the loyalty that those tools create. But the competitors are offering me free handsets to churn. My carrier’s response: nothing if I carry on status quo, but they will also offer me free new phones if I stay on. I don’t want a phone, but I’d rather take a phone over nothing! As a result, I accepted three free phones, which I promptly put up for sale at auction.
What if, instead of offering me unwanted subsidized phones in exchange for my lock-in, the carrier had instead offered me rebates, free services like ‘family locator’, higher data caps, priority data, or just plain cash? Instead, customers go through this 2-year cycle where they shop out their business to competing carriers, and take un-needed phones just because that is all they are offered. It’s a blunt business tool, it’s vestigial, it’s not good for the environment, and there are cheaper options that would create more customer loyalty.
Here’s the suggestion to you carriers out there: Start offering no-contract plans so that you can grow the market, start to get customers buying their second and third connected devices, and steal subscribers from your competitors who don’t ‘get it’. You’ll note that YOUR competitors (MetroPCS, Wal-Mart, Leap, Boost, Tracfone) are already doing this. But you can get ahead by not just offering this to the lower end of the market, but to premium customers, too. Some people don't like large cash outlays, others don't like 24 month commitments. Carriers need to realize that the 24 month contract is as much of a barrier for some customers as the $400 phone ever was to others.
Next, it’s good that you now offer your existing customers loyalty rewards like a new phone after two years, but it’s time to get a little more creative about what to offer. My ideas two paragraphs above are a good starting point, but you can get further out of the box: Why not trade new 24 month contracts for iTunes or App Store credits, or movie theater passes? How about the obvious option of a cheaper monthly subscription rate? Take the $200 you spend on the subsidy, and spend half as much on something creative, and you may get just as great an effect.
I’m not saying the cellular operators should do away with subsidies. The customers are trained to seek them, and they do offer device control. Instead, I’m arguing that carriers should offer modern incentives for loyalty, and create new options for that growing segment repulsed by two-year sentences. The need for subsidies to get people onto the networks is gone.
Final note: I mentioned stuffing old phones in a drawer. Many people actually do this, and it’s a waste. They get old in the drawer, the batteries die, and they end up in landfill with toxic chemicals leaching into your water. With that high environmental cost, we may as well get more value out of those old devices. Send them to a recycler or a charity that can put that phone to good use. See this website http://www.ecobusinesslinks.com/cell-phone-recycling-recycle.htm for more info (no endorsement). Or just take your old phones to any Staples store.
by Derek Kerton
Principal Analyst, The Kerton Group
|
About Us
kertongroup.com
+1-408-935-8702 |
|
The Kerton Group provides insightful, expert consulting in wireless telecommunications to companies across the entire value chain and around the world. Our analysts' deep, vertical knowledge of the wireless industry delivers a complete understanding of the technology, market, and business issues our clients face today and in the future. The Kerton Group's expertise is internationally recognized in widely distributed industry reports, articles, newsletters, and frequent quotes in national press and industry publications. Our services include strategy, business development, research, marketing, product development, due diligence and technology transfer services. We also run the SPIF, a private investment forum for telecom investors. Our projects, clients and publications are detailed online: www.kertongroup.com.
|
