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Renewed Focus on Subsidy in Telco?

May 5, 2022 - David McGlew

A new subscription model could change how consumers think about upgrading to the latest handset device

Telcos strive for ongoing streams of revenue through avenues like subscriptions, emulating the business model of streaming services such as Netflix, Disney+ et al. This model allows the market estimated value – linking growth in subscribers to future revenues –  to all be rather straightforward.

Given that it has become customary to pay for data usage through a monthly subscription, it is hard to envisage that there once was a time when the handset was the key driver in the business model. Handset subsidies paid by CSPs are an expensive (albeit expansive) business –  driving the cost of monthly post-paid tariff plans to new highs and evolving the length of contract from 12 to 24 months to cover the cost of the latest device.

 

Ten years ago, the CSPs managed to break this highly subsidized, expensive upgrade cycle with the advent of SIM-only tariffs and BYOD (Bring your own Device). Thus, successfully managing to decouple the tariff from the handset, which in turn reduced the operational drive to re-contract subscribers based on upgrading devices. This reduced the focus for some subscribers to be coerced into a new handset contract every 12 or 24 months given that a proportionate number of consumers were happy to keep their handset for longer, if it meant cheaper tariffs. While this may have suited the CSP and the consumer alike, it possibly did not sit as well with the product manufacturers.

 

Apple is by far the largest of these handset manufacturers – successful beyond most companies’ imagination. With that success comes unsurmountable pressure on them every year to showcase the innovative incentives and standards they plan on introducing to the market in the next phase of their growth. Previously, new product innovation such as AirPods, iMACs all played a massive role in redefining standards. Despite this, over 50% of Apple’s sales revenue comes from the iPhone, which is in part due to the allure of the product’s capabilities as much as the immediate procurement of the product upon purchase. This means that any change in buying behaviors, or purchasing procedures, such as waiting longer between upgrading and/or replacing handsets will likely impact revenue growth. Therefore, it is fair to assume that Apple is always pushing for newer models of their products to ensure the revenue growth continues to stem from customer perceptions of instant gratification of an upgraded model.

 

In April 2022, Bloomberg announced that Apple will be planning to trial a new commercial model of handset ownership, whereby the consumer will pay a monthly direct subscription for their iPhone, rather than pay in full. While this has yet to be officially launched, or confirmed by Apple, it is believed to apply to hardware such as iPhones and iPads. The model will make device ownership like paying a monthly app subscription fee rather than outright buying it. Other hardware/software vendors in the market offer similar types of service – for instance, Microsoft offer Xbox console ownership of models which allow for flat monthly installments over 24 months. In that same light, Apple already has payment plans for upgrading iPhones which allows the user to pay for the cost of an iPhone and AppleCare in installments over 24 months.

 

So, what is different about this reported subscription plan? Bloomberg reports that the monthly charge for this new service will not be the cost of the gadget divided by 12 or 24 months. Instead, it might be an unspecified monthly set fee contingent on the device chosen by the customer. Moreover, it is conceivable that there will be other Apple services, such as Apple TV, iCloud, Apple Arcade, Apple music to name a few, linked to this subscription guaranteeing Apple a greater share of the consumer’s wallet.

 

Now, this begs a few questions – such as, why is this noteworthy? And how should the CSPs evaluate this? The answer really boils down to who owns the customer relationship, who has the charging/billing relationship, and who controls the narrative on when to upgrade devices from a customer lifetime value management perspective. It is common knowledge that within the telco end-user relationship, the handset is central to how services— both existing and new—  are marketed and consumed. So, in the race to bid for the consumer’s monthly subscription, the handset could ultimately turn out to be the new battlefield for competing vendors. One in which the CSPs need to have a clear view of what the prize is.

 

The million dollar question is: are CSPs agile enough to innovative commercial models able to rival handset manufacturers?

 

 

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