How much does that cheap smartphone really cost?, OECD

JULY 4, 2013

by Guest author

Free back pain with every purchase

Today’s post is by Agustin Diaz-Pines of the OECD’sDirectorate for Science, Technology and Industry

For years, mobile operators have based their commercial strategies on offering smartphone devices at very low upfront prices. Consumers have become accustomed to commercials such as “free smartphone” or “smartphones at $0 on a two-year contract”. Most of these offers provide devices for free or at very low prices in exchange for contract commitments.

This strategy has proven extremely successful in recent years, as shown by the rapid uptake of smartphones, which exceed 50% in some countries. But how much does that cheap phone cost you? A new OECD report sheds light on mobile handset acquisition models, and provides pricing information from selected operators in 12 OECD countries for 2012.

When consumers sign up for a mobile communication service, they may either bring their own device (BYOD), purchased at the full price directly from the operator or from an independent retailer, or enter into a contractual agreement for a specified period with a mobile operator, which includes a handset at a reduced upfront price.

This is inaccurately described as a “handset subsidy” by most stakeholders, whereas it should rather be  termed as a “bundled” purchase of a handset device. This raises the question of whether the total cost of ownership (TCO) of the device, together with a mobile service contract, would be higher if customers chose a bundled purchase or a stand-alone acquisition of the handset device.

So, are you better off when bundling devices and mobile plans?

In some countries, consumers do not have the choice of buying a bundled discounted handset or not, as some of the most popular smartphones are only made available upon signature of long-term contracts (e.g. three years for the iPhone in Canada until recently, where authorities took steps to make markets more competitive). In many other countries, most mobile plans always include an entitlement to a handset discount – discounts usually being higher for costlier mobile plans – which makes the BYOD option unattractive (e.g. Canada, Italy or Spain). In countries such as Korea, however, the associated handset discounts are relatively small, even for the heavy users, as operators have relied on handset discounts to a lower extent.

For those countries where both options exist, such as in France or the United States, the report concludes that the bundled option (with discounted smartphone) was, on average, between $10 and $20 a month more expensive than the BYOD option. Of course, these differences may depend on other aspects, such as the quality of the network or additional customer service. It is, however, of concern that these differences are not always made evident to consumers.

Finally, in a few countries such as Australia and Italy, operators disaggregate the cost of the handset device in their monthly bills, which empowers consumers by revealing the associated cost of a smartphone.

Do prices for smartphone devices influence the OECD mobile pricing statistics? The report addresses whether smartphone prices are likely to distort OECD mobile voice and data price benchmarks (pdf). It does so by  mapping mobile service prices and a popular smartphone device (iPhone 4S 16GB) and estimates the total costs over a three-year period.

For mobile services, consistent price benchmarking is only slightly affected by the presence of bundled discounts for popular smartphones. In fact, costs expressly associated to smartphone ownership only account for between 6% and 24% of the total cost of ownership, depending on consumption patterns. For example, explicit mobile handset costs only represent 11.44% ($9.67 in purchasing power parity terms) of the total cost of the 300 calls plus 1 GB basket ($84.51). For some countries, however, part of the handset cost is included in the mobile plan.

Basket of 300 calls + 1GB, including VAT, per month, February 2012

This does not translate into substantial changes in country rankings. In fact, when comparing rankings before and after adding handset costs, within a set of 12 countries, changes of more than one position only took place on two occasions in 36 data points, with the rankings remaining unchanged in 19 other data points.

In 2012, in France, the new entrant Iliad (Free Mobile) launched a financing scheme for smartphones, which permitted customers to decouple  mobile service contract and smartphone purchase. This revolutionised the way French subscribers purchase smartphones and showed the benefits of increased transparency and switching capacity.

In Canada, in 2013, the new wireless code addressed existing concerns by Canadian subscribers, such as the length of wireless contracts or cancellation fees. Canadian customers will now be able to terminate their wireless contracts after two years without cancellation fees, even if they have signed on for a longer term, have their cellphones unlocked after 90 days, or immediately if they paid for the device in full, among other issues such as data roaming caps.

In other countries, such as the Netherlands, carriers are reacting to quickly changing competitive pressure and smartphone usage boost. For example, the cost of KPN’s offer “Bell-SMs-Web SO 1500”, which included 1500 SMS and 1GB of data, was around $120 in February 2012. The cost of an equivalent bundle in February 2013 decreased to $65.

Smartphones play an important role in the development of the Internet economy. 3G and 4G mobile networks, together with the rapid adoption of smartphones, have facilitated mobile broadband uptake. The bundled sale of a smartphone device, with a significant upfront discount together with a mobile communication plan has played a substantial role in users taking up or upgrading their smartphone devices at a faster pace.

Both the mobile ecosystem and consumers can benefit from these practices by reducing consumer lock-in (e.g. by purchasing smartphone through monthly instalments), increasing transparency (e.g. by disaggregating the cost of a smartpone in the monthly bill) or promoting handset unlocking, which could stimulate switching. Consumers can still benefit from the bundled purchase of smartphone devices as long as they are sufficiently informed and empowered to compare different mobile plans, including quality and prices.

At the end of the day, it’s all about competition and consumer empowerment