>> In markets which are approaching saturation, operators are more and more
>> moving away from subsidising handsets, at the very least the level of
>> subsidies are being reduced.
>
> Hmmh. Can't quite agree with that.
>
> On mid 2000, about 85% of households in Finland had a
> cellular phone. At the same time there were about 4.6 million
> cellular subsriptions. Finland having a bit over 5 million
> citisens I'd say we are quite saturated market.
>
> Still, the operators continue to heavily subside the handset
> sales. Money from the subsiding operators and selling additional
> accessories is pretty much the only way to companies selling
> cellular to phones stay alive.
It's no good o take one sample and then say "continue to subsidise"
How much did operators in Finland spend on subsidies in previous years ?
a) as a total
b) as an average per unit
This data you would have to corellate to the replacement to new unit ratio.
As replacement units constitute a bigger share the more a market saturates
the more the operators will pay subsidies not to win market share but to
keep market share. Bribing customers is not only a very expensive way to
fight churn but also a method that customer loyalty experts say doesn't
work in the long term, and they have the figures to back this up.
It will therefore be the aim of the operators to reduce the cost of churn.
You would need to take a look at the ARPU (average revenue per user) and
the average subsidy paid per user per year to see how much an operator can
afford the subsidies.
You may also want to look for differences in particular market segments,
such as prepaid.
In the UK, for example, operators have started to crack down on subsidies
in the prepaid segment first, for one, to test the water for a trend shift
and secondly because Virging Mobile successfully introduced a no-subsidies
no-frills no-lock-in cheaper-tariffs-in-return business model that forced
them to follow.
The average ARPU for OECD countries was around 35 USD per month in 2000 (or
maybe it was for 1999). That, is about 400 USD per year. You may say that
networks can easily afford to pay 100 or 200 USD subsidy per year. The
trouble is that operating cost, investment in new infrastructure and
serving loans for previous network build-out can easily soak up a large
part of that 400 USD. And investors want to see good dividends or they
might take their money elsewhere.
The chance is that a network like One2One in the UK with about 1m customers
can ill-afford to pay handset subsidies. Let's assume their operating cost
is 200m pounds a year. If their ARPU is 30 pounds per month, the operating
cost would have already consumed nearly 7 months worth of revenue. If they
pay an average subsidy of -say- 60 pounds only, that leaves them with 100m,
from which they have to pay taxes, serve loans, finance employee share
options, make investments in new infrastructure and please investors. Say,
this all was available cheaply at 50m, that would leave them with 50m net
profit, not a lot for a 10bn pounds company. If you put 10bn into a savings
account, you could expect to get 10% interest, that's 100m, for doing
nothing, no risks. Deutsche Telekom, who own One2One and shoulder the risk
would therefore want to see more return than what they could get on a
savings book.
Where better to start cutting cost and improve your balance sheet than on
an item that doesn't create any value in the long term: handset subsidies.
A sustainable business is one that aims to have fewer but loyal customers
with a high net present value and low maintenance cost. Subsidies for
handsets are about putting market share first, regardless of the net
present value of customers and regardless of the maintenance cost of those
customers. This is not sustainable.
The mobile phone industry is one with the highest cost of churn. Mobile
phone companies are spending tens of millions of dollars on CRM systems
because they have realised that they are on the wrong track and that they
need to convert to a sustainable model or go bust.
Like everywhere else, TANSTAAFL applies.
regards
benjamin
>--
>Mika Tuupola http://www.appelsiini.net/~tuupola/
>
>
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Received on Fri Jul 27 22:19:43 2001