New Models for Mobile Device Financing

By Susan Simmons, Raj John, and Eric Holzhauer

In the past decade, so much has changed: the way we use mobile devices, the type of devices we use,
and the amount we spend on now indispensable smartphones. Yet the traditional subsidy model
the predominant financing model in most markets has persisted and remained largely unchanged.
A number of forces are now pushing mobile operators to consider alternative financing models.
These same forces are also creating new opportunities for non-operators, including device OEMs,
retailers, and new entrants, to participate more extensively in mobile device financing.

November 2012

Cartesian: New Models for Mobile Device Financing

The Burden of Mobile Device Subsidies Is Becoming Unbearable

Market forces are placing increasing pressure on the traditional subsidy model for postpaid wireless
subscribers. Though this is a global trend, it is obviously focused on markets where the subsidy model is
most common. There are a number of factors that conspire to increase the cost of the subsidy model for
Mobile Network Operators (MNOs).

Handset Lifetime Has Decreased

In an effort to drive more volume, smartphone OEMs have decreased the time between device releases,
with many now releasing new products annually. Wireless subscribers particularly smartphone owners
are increasingly motivated to own the latest and greatest device. As a result, average device lifetime has
been decreasing since 2006, a trend that is projected to continue.
Average US Handset Lifetime in Months*

* Data do not take into account reuse through sales of refurbished phones, or hand me downs, etc.
Source: eMarketer, Oppenheimer, Cartesian

Subsidy Costs Have Increased

The wholesale price paid by MNOs for high-end smartphones has increased to $400-$600, but since many
consumers do not expect to pay more than $200 for their phone, operators are forced to subsidize the
difference or risk losing customers to their competitors. Though many subscribers are adopting low-end
smartphones with lower subsidies, this segment generally represents feature phone upgraders, whose
purchase of any smartphone results in an increase in subsidy costs for MNOs. Far more impactful are the
high-end smartphone subscribers, who demand a price point of $200 for a phone that costs the subscriber
as much as $600. Ultimately, subsidy costs for operators can be as high as ~25% of revenue, and have been
increasing over the past years.

Operators Are Attempting to Discourage Early Upgrades

Recent shifts in device-related policies are evidence of the strain being placed on MNOs. MNOs are taking
steps to discourage early upgrades and minimize the increasing impact of subsidies. US examples include
the following:

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Cartesian: New Models for Mobile Device Financing

Changes in Subsidy Policies by US MNOs

Increasing Contract Length
Raising Early Termination Fees

Sprint eliminated 1-year contracts in October 2012.

In May 2010, Verizon raised their Early Termination Fee (ETF) from $150
to $325, less $10 for every month of services paid for by the consumer.

Delaying Upgrade Eligibility

T-Mobiles upgrade eligibility is the longest of major US carriers at 11

months on a 1-year contract and 22 months on a 2-year contract.

Increasing Early Upgrade Fees

AT&T raised early upgrade fees from $75 to $200 in 2010 and to $250
for smartphones in 2011.

Though these policies may improve operator economics, they fail to address shifting customer needs and
ultimately risk damaging customer relationships over the longer term. MNOs need to evaluate their
approach to device financing holistically in order to address this growing disconnect.

MNOs Are Using Device Financing Models

Besides attempting to discourage early upgrades, operators are trying out new models in an effort to reduce
their subsidy burden, respond to changing subscriber demands, and provide advanced devices more
effectively and profitably. These models are either launched alongside or instead of the traditional subsidy
approach. Some of the major model types are discussed in the following table:
Major Attributes of Alternative Subsidy Models

These alternative models differ based on whether a contract is required (and what type), who pays for the
device (and when), and what happens to the device at the end of the contract. As a result, they fulfill
different operator/customer needs and address particular customer segments:

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Cartesian: New Models for Mobile Device Financing

Device Leasing: For subscribers who want a new device for free upfront, and dont mind being
required to return it at the end of the period. Best for budget-conscious customers and shorterterm subscribers.
Technology Assurance: For subscribers willing to pay a little extra for the perk of upgrading every
year. Best for device lovers and higher income segments.
Explicit Monthly Repayment: For customers who want to understand their bills better. May also
be instituted by an MNO to increase understanding of the subsidy model.
Bring Your Own Device (BYOD): For customers who dont want to be tied to a contract, want a
lower service plan cost, or have a hand-me-down device.
Device Buyback: For any customer who wants to reduce the cost of a new device and doesnt have a
use for their old one.
Note that in actual implementations, these models are more fluid than the categorization may imply. For
example, an operator may create an offer with an explicit monthly payment for the device that provides
technology assurance and uses device buyback at the time of upgrade to offset some of the costs to the
consumer.
These alternative models have gained traction, particularly in Europe and other areas where the traditional
subsidy model is not as deeply ingrained in all segments and where consumers have shown greater
willingness to pay for handsets upfront. As a result, both operators and subscribers have become more
receptive to changes. Given the pressures on the traditional subsidy model, we expect proliferation of these
alternative models in additional markets. Below, we lay out some of the current offers that are similar to
the alternative models we have discussed:
Existing Alternative Models in International Markets

* Phones4U is a retailer,
but is included here due
to its JUMP plans
similarity to Technology
Assurance

Source: Current
Analysis, ZDNet,
GigaOM, Cellhire,
Cartesian

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Cartesian: New Models for Mobile Device Financing

Other Players Are Also Taking Advantage of Device Financing Opportunities

Non-MNO players (e.g., consumer electronics vendors, retailers, new entrants) have begun to offer
alternative models, and could ultimately further drive the device financing trend. Inserting another player
into the value chain, however, would weaken the MNOs hold over device sales and the customer
relationship, which has already been altered by the growth in smartphones.
Most current programs from non-MNOs concentrate on device buyback. Consumers can sell their devices
through online channels, retail stores, OEMs, and specialized 3rd party re-commerce players like Gazelle
and NextWorth. These programs, essentially de facto financing models, provide consumers with simple
ways to extract the value from used devices. This has reduced consumer dependence on subsidies,
increased the competitiveness of the handset market through the increased sales of refurbished devices,
and allowed new players to capture some of the value of devices that carriers are so heavily subsidizing.

Implications of Device Financing Models

The growth of alternative models for device financing will carry potentially game-changing implications for
all players in the wireless space:
Consumers will switch to service providers that have device financing offers that meet their
needs/preferences.
Operators that dont actively participate risk playing a less significant role in their customers' overall
wireless experience, thereby reducing some of the clear benefits of subsidies (i.e., acquisition, retention,
engagement).
Device OEMs have an opportunity to continue to wrestle the consumer relationship away from the
operators.
There is a growing opportunity for non-operators (e.g. retailers, new entrants) to address multiple
underserved and growing segments.
Collectively, these approaches will not replace the traditional subsidy model. Rather, they will address
specific niches, and their potential success in a given situation will depend on market context, customer
segment, and operator strategy.

For operators, the question is shifting from whether to pursue these alternative models to how to pursue
them:
How to effectively target and support such alternative models that will have low penetration (5% to
10% of customers)?
Whether to partner with device OEMs or new entrants?
How to design these models so they can co-exist alongside traditional subsidy models?
How device financing can be used to reduce the subsidy burden?
How to ensure alignment between these new models and long-term (3-5 year) device strategies?

Copyright 2014 The Management Network Group, Inc. d/b/a Cartesian. All rights reserved.

Cartesian: New Models for Mobile Device Financing

For OEMs, the central questions are about customer ownership and where the OEM plays in the subsidy
value chain:
Whether to pursue standalone OEM models or partner with MNOs or others?
What alternate subsidy models will best drive device sales?
How best to deepen the customer relationship and promote loyalty using device buyback and/or
financing?
Can new models be tied to other services in order to drive uptake and revenue?
New entrants and retailers should consider how alternate subsidy models can increase their device sales or
present new revenue opportunities:

What MNO and/or device refurbishment partnerships will provide the best returns?
Can device buyback be incorporated easily and profitably into existing business plans?
Under the current subsidy structure, are there other opportunities?
How best to respond to evolving MNO alternative models?

Copyright 2014 The Management Network Group, Inc. d/b/a Cartesian. All rights reserved.

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