Research Notes

Can a mobile operator achieve greater success in The Free Terminal Market?

We ask: Why subsidise terminals?
The mobile industry is experiencing rapid development. A development that influences the mobile operators business in the short, medium and the long term. Mobile operators have to consider this development for their future strategies.

In Strand Consult’s report – Mega Trends in the mobile industry, a question of life or death – we analyzed and described the most significant trends in the future mobile development! Trends and developments that will lead to the consequence, that each single mobile operator in smaller or larger scale must adapt their grand strategy to these new facts. Based on one of these trends and the developments, we at Strand Consult have identified and analyzed 6 very different operator strategies, which mobile operators can use for inspiration.

The free terminal market strategy is based on the idea, that operators completely stop subsidising terminals, but on all other areas continue their present strategy. This strategy is a significant break in the basic thought amongst many mobile operators, who feels sale and subsidising of terminals is a central part of the operator’s business model. The idea of using the The free terminal market strategy is, that the mobile market in many countries/regions is saturated, which means that the operators are in the game of stealing customers from each other. Most often churn is the only thing stimulated by this, not the development of new markets or segments.

In some markets operators have already tried to stop subsidising terminals, the Danish market being one, and in other markets subsidising is not allowed for legal reasons, namely Belgium and partly in Finland. The experiences from Denmark shows,that it is difficult for the operators to stop terminal subsidising, as a single operator can gain a significant advantage by being the only operator offering cheap terminals. So the way of achieving a positive effect with a stop of terminal subsidising is that all operators stop subsidising, however it is illegal to make an agreement for all operators to stop subsidising in most countries.

One positive outcome of a total stop of subsidising is a lower churn, as customers are not constantly tempted to buy cheap terminals. The operators reward for disloyal customers disappears, when  loyal customers are no longer paying for the operators business of offering cheap terminals to customers changing operator every year to get the latest terminal.

A second positive effect is the drop in costs. Subsidising terminals represents 20-30% of operators cost, and such a significantly drop in cost is felt on the bottom-line. The drop in cost can be used positively to invest in the mobile market by i.e. lowering prices on simple telephony services like voice and SMS, which can have a significant positive effect on the market. In markets with low subsidisation the mobile operators have more flexibility in the way they act compared to markets with high subsidization.

A third positive effect is the elimination of counteracting interests between operators and retailers. When a retailer sells a new subsidised terminal to a customer, the retailer will increase his turnover. However, at the same time the sale of a subsidised terminal will most often also result in churn for one of the operators in the marked. Therefore operators and retailers can have a conflict of interests when it comes to sales of subsidised terminals. 

A fourth and very important effect is that the mobile users will not focus so much on getting a cheap subsidised terminal, and this means that the focus is set at other differentiation parameters. Especially, focus on mobile services as a competitive factor, which will have a positive effect on the market and on the upgrading from 2/2.5G to 3G networks.

However The free terminal market strategy also has some negative implications for the operators. The operators will indeed have less control on the terminal market, as a larger part of the terminals will pass outside the operators distributions channels, which will prevent operators from pre-configuring terminals and pre-installing i.e. clients on the terminals. In markets with tradition for subsidising terminals, much of the terminal sale is through operator-controlled sales channels.

The strategy can also mean a slower development of the mobile market, as the sale of new advanced terminals will slow-down, as customers might be reluctant to pay a terminals full price. This effect can be seen on the Finnish market, in which customers have been reluctant to buy new terminals. This slower terminal replacement can have negative influence on the VAS market, as services are highly dependant on functionality in the terminals. Recently, the consequence in Finland has been that the subsidising of 3G terminals has been allowed to facilitate the development to 3G.

For more information about the free terminal market strategy we will refer you to our latest report – Successful Strategies for the future Mobile VAS-market – wherein the free terminal market strategy and five other possible operator strategies are analysed. Each of the six strategies are analysed in details with the aim of identifying the different strengths and weaknesses. The mobile operator strategies are analysed through a length of parameters to give operators a tool to help them focus on how the different strategies will influence their business case. The different strategies can also be combined taking parts from each other and hence the numbers of strategies are numerous.  

Successful strategies on the future VAS market

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