3GSM Wrap-up: Subsidies And Cost Cutting

A common thread in no less than three CEO presentations here in Cannes was the desire to get rid of handset subsidies. Vodafone, India’s Bharti Telecom, and T-Mobile CEO Rene Obermann all vented on the ills of subsidies. But carriers have hated subsidies for years, and done little to stop them. It is difficult to do so in a competitive market where other carriers will not match a drop in subsidies, and suddenly YOU have the most expensive terminals. So… a little collusion might solve the problem, yet it’s illegal to discuss such things in back rooms. Which is why it was discussed in a very public forum instead. These CEOs are hoping to signal to their colleagues that they are ready to roll back handset subsidies. In many ways, Obermann’s arguments make sense. In a market with low penetration rates, subsidies help get phones into users hands without the high initial cost that constitutes a barrier to entry. Then the subsidy cost is recovered over months and about a year later the customer becomes profitable for the carrier. But once a majority of subscribers already have phones, Obermann argues that the market no longer needs subsidies to get phones into people’s hands, and that the subsidies only serve to promote churn. It’s true that in a mature market, there is less sense behind subsidies, but let’s not forget that carriers are constantly trying to get users to adopt new services and new data plans, and that without new phones, we could not use these new services. Carriers need to continue subsidizing phones if they want people to continue to update their phones every 18 months, and thus be able to access the latest $2 polyphonic ringtone. But even more importantly, Obermann completely forgets to notice one major benefit subsidies offer carriers: control. For example, WiFi/GSM phones might be attractive to customers who would like to have their phone roam off the cellular network onto their WiFi network to save money while at home or in the office, but since that is a threat to the carriers, they will not subsidize such phones. Because they will not subsidize these phones, they will always remain expensive, while a standard cellular phone (to the customer) is free. The subsidy allows carriers a measure of control as to what devices are out there. Wipe out subsidies, Mr. Obermann, and you will have NO control over the types of devices on your network. That’s fine by me, but carriers may not like it. On cost-cutting, it was interesting to hear Sunil Bharti Mittal suggest that western wireless carriers were, essentially, wasteful, pointing out that by running a lean, efficient operation, Bharti was able to be profitable charging their customers just $0.02/min and earning an ARPU of just $5. Point taken. If Bharti can buy cellular equipment, purchase spectrum, and operate their networks profitably with those metrics, shouldn’t pre-pay in the EU be less than $0.50/min? I guess somebody has to pay for those 3G licenses.

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