The Double-Edged Sword Of Smartphones – Lower Churn, Lower Profits

Smartphones are a double-edged sword for cellcos. Top end models have huge power to attract customers, but those users expect heavy subsidies, which can eat into the profits on the data contracts. This was seen clearly in the latest quarterly results from China Unicom, which is experiencing the kind of margin woes that afflicted AT&T at the height of its iPhone exclusive. On the plus side, advanced handsets make it far easier for cellcos to lock customers into longer contracts and so reduce churn, a key performance metric. In Western Europe, rising smartphone penetration is the main factor behind a decline in average churn rates to 2.3% in 2010.

Focal Points:

• Admittedly, this figure is down just one percentage point from a very high level – in 2009, western Europe experienced its highest ever churn rate, at 2.4%, with some countries well above that. In particular, the hyper-competitive UK suffered churn of 2.9% during that year. Now, at least, the tide is in the right direction, according to data from Wireless Intelligence, whose senior analyst Matt Ablott links the development directly to “increasing smartphone penetration, which has allowed operators to lock-in high value customers.”
• The carriers with iPhone exclusives showed, back in 2007, how a high end and alluring device could increase customer loyalty. The study says that churn rates at O2 UK, Orange France and T-Mobile Germany fell to between 1% and 1.2% during the varying periods when they had Apple exclusives – at a time when general churn in the region was still rising. By contrast, Vodafone UK’s churn rose from 2.8% to 3.4% during the time when its rival O2 had the sole iPhone rights.
• The iPhone is non-representative because the length and terms of its exclusives, in its early generations, were unprecedented. However, it highlighted how smartphones could make users more tolerant of two-year data plans and other churn antidotes. That trend will be diluted from next year though. The US, where prepaid deals are least common, is seeing a shift away from contracts, and while smartphones have created the opposite pattern in Europe, where there are more prepaid users, there is a steady move towards flexible plans, unlocked devices and other data approaches that do not tie the user down for more than a month. The backlash against two-year contracts will intensify with 4G and with the proliferation of non-phone mobile data gadgets. In addition, two-year contracts will become illegal in many European territories soon.

Editor’s Note: Based on the trends of Any Device and Bring Your Own, enterprise IT departments will need to be prepared for the impact of these developments, namely the user’s propensity to obtain the next new thing. If two-year contracts are going away, then IT executives should be prepared for periodic high activity when the next new smartphone comes out.