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Growing Negative Impact from Smartphone Subsidies

Mobile network service providers have a major business model impediment -- they're still subsidizing handsets, but not reaping the return on investment (ROI). The current global market outlook is troubling to analysts.

Moreover, savvy Over-the-Top (OTT) service providers and software application developers continue to take revenue share in the evolving marketplace -- often at the expense of the network service providers.

The pressure on mobile device subsidy ROI is caused by lagging worldwide carrier revenue growth which is not keeping up with subscription or connection growth -- or the cost of subsidizing expensive smartphones.

Connection growth is 10.9 percent CAGR from 2008 to 2013 and 4.2 percent for service revenue over the same period, according to the findings from the latest market study by ABI Research.

Device subsidy is the single largest cost for a mobile network service provider over the lifetime of a subscriber’s contract -- 68 percent of the revenue derived from a typical 24 month contract. A number of factors will increase pressure on device subsidy in the next two years, including:

  • Over the Top revenue loss.
  • Competitive price pressure.
  • Regulation (example, EU roaming regulations).
  • Multiple device ownership – smartphones, tablets, smart glasses, and other wearables.

"Carrier's cannot continue to subsidize all these devices, yet they must maintain their place in the value chain, their relationships and touch points with subscribers, where device subsidy plays an important role," said Nick Spencer, senior practice director at ABI Research.

ABI believes that these mobile network service providers need to consider a more transparent and varied way for consumers to purchase their mobile devices.

Innovation in the mobile device market is so rapid that consumers do not want to be tied to an aging device for two years, but carriers cannot afford shorter contracts, so more flexible options are required for the customer and to reduce the subsidy burden for the carrier.

Transparent and outsourced subsidy is one such option, according to ABI's assessment. Gradual and strategic use of transparency and outsourcing will educate the consumer about the costs of the device and reduce the burden and risk for carriers, enabling them to wean themselves off the habit.

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