Living on Credit
By Steve Wallage, Thu Feb 06 12:45:00 GMT 2003

New phones are expensive gadgets. The operators have relied on contract subsidies as the allure to make people upgrade. But, financing options can be a far better option.


The mobile industry has moved away from the days when users thought that (at least in some countries) they could get a new mobile device for free. However, most would be amazed if they knew the real cost of a new phone, and the difference between what the operators pay to manufacturers and what users are charged.

In the glory days of mobile with annual growth rates of around 100% was not unusual, this did not seem a problem. When talking about the most attractive contract customers, subsidies can also seem a small price to pay in retaining such business. However, when looking at the majority of the user base, it would make sense for the operators to use credit options as a way of getting users to be able to pay sensible prices for new devices.

How is it Now?

I did, an admittedly, unscientific survey across about 20 European retailers (not operators). None currently offered financing. Despite this, it was interesting to hear the sales pitches.

Many pushed the contract option hard. For example, I approached one retailer about purchasing a Nokia 7650. They would not sell it on its own. They had one prepaid option for which the price of the handset would be 180 (around 270). But if I was prepared to go to a contract option, then the price would be 99 with any monthly rental of at least 20. If I went with a particular contract option costing 30 a month (with all the associated free minutes) then the device would be free.

Others suggested I should just wait as in the words of one, "The camera phones will be dropping in price dramatically". Or, as a variant on the idea, there would be special promotions throughout the year that would slash the price of the handset.

Other options were slightly more creative. A couple of retailers suggested I register as a business with them, and could then enjoy 30 days credit. Several suggested that I should look at 'reconditioned' second hand terminals.

Interestingly, there did not seem a greater push on financing in markets where subsidies are banned, or by 3G operators.

In South Korea, Samsung reported a drop in fourth quarter 2002 handset shipments which it directly attributed to its inability to offer subsidies. The South Korean government has now relented and plans to allow subsidies, "to promote new technology." As part of this, the Government is encouraging, and specifically authorizing, the creation of monthly interest-free instalment schemes.

For a 3G operator already posting prices such as Hutchison 3G, a new handset is typically 750. Yet, there are no details forthcoming on financing options to help with this upfront payment.



Where is it Offered?

Most of those companies offering mobile finance are not exactly making a song and dance about it.

Vodafone offers a mobile finance deal, but only in the UK with no stated plans to extend it to its other operations. It also relies on its sales channels to push it, who also seem mostly ignorant of it. The deal is purely for contract customers for high-end phones and PDAs. The scheme provides ten monthly interest free payments to cover the cost of the device. Unusually, the scheme is underwritten and organized by Vodafone themselves, rather than by a third party financial provider.

A few other operators, such as O2 in Ireland working with GE Finance, offer a similar service. However, the one operator who does seem to openly push the idea is Telecom New Zealand. They aggressively promote the mobile financing route both through their stores and for online purchasers.

The financing is organized through a third party, FAI Finance, and payments are made directly to the bank. Financing options are far more flexible with payment possible either weekly, fortnightly and monthly, and payment term either 12 or 24 months. The deal is interest free, although there is a one-off booking fee of NZ$35 (around 15). The operator does not provide numbers but says that the deal is popular and allows subscribers to buy high-end terminals. Importantly, the deal is not restricted to contract users.

The Contract Complacency?

Is heavy subsidy for contract users a mistake? I recently spoke to a financial analyst specifically covering the mobile sector on this. He believed that typical gross margins being earned by European operators on contract users was 50-60%. He felt that any subsidy could therefore be justified against the high profitability earned over the lifetime of a contract user, and operators did not need to worry about offering financing. This argument can be far too simplistic for three main reasons.

First, not all contract customers are equal. A lot of contract users have been attracted by the offer of bundled minutes and SMS. They are taking contract options to try and save money rather than because they are high mobile spenders. In fact, many European consumer associations advise users to opt away from pre paid packages. The truth is that much of the profit earned on contract users is from the 15-30% of users with very high usage.

Second, the operators cannot afford to ignore the majority of their users - the pre paid users. Operators cannot afford to alienate pre paid users by only offering subsidies to contract users. They should not start offering massive subsidies to the pre paid group. But offering mobile finance will allow these users to upgrade in an affordable manner.

Third, the mobile market will become ever more competitive as new virtual operators enter the market. The MVNOs will not only bring their brand and marketing skills, but also experience of such areas as loyalty schemes and financing. Operators should look at offering such deals before new providers beat them to it.

Other Alternatives

There will also be other efforts to make mobile, and specifically, 3G more attractive to the mass market. One is sponsorship and advertising. Some well known brand names are looking at ways they could promote their services while offering a cost reduction to users. Such initiatives could vary from simple handset badging to screensavers, portal promotions, text adverts and voice adverts.

A second wave of initiatives could come from governmental sources. A good example is the Free-G project. The project plans to implement mi800 - a billing solution that brings the principle of the fixed freephone 0800 service to the GPRS and 3G world. The idea is that businesses will offer their customers subsidized access to their mobile web sites. An EU grant of around 25m has been provided to try and overcome such issues as interoperability, inter-working and roaming. It is envisaged that a wide range of usage and content-based data billing solutions can be developed.

Future steps

As mobile operators now often state, they do not want to become banks. Mobile financing does not mean this. It makes sense to leave it to a specialist financial provider, and this allow the operators to reduce their own exposure to the risk of bad debt.

It has been a looming problem for operators of how to get users to pay for new phones. Heavy subsidy is not the answer other than for the most attractive users. The mobile industry cannot just rely on the early adopters paying 700 for a new 3G phone. They need to offer another alternative to users, and one that makes business sense. Mobile financing, if sensibly implemented, can be just that solution.

Steve Wallage works and writes for the451. Steve has more than 13 years of experience as a technology analyst specializing in telecommunications.