Impacts of a handset leasing model on mobile telcos

Following yesterday's post, here's some related thinking on the impacts on operators of handset leasing.

Handset sales represent around 25% of operator revenues in a typical European market, but generate only around 5% of margin. It may therefore be the case that the scenario described would lead operators to a more profitable structural model than exists today. Oil companies are consistently and acceptably profitable, despite being (literally in some cases) the ‘dumb pipe’ that operators are so desperate to avoid becoming.

One of the reasons for the oil majors sustained profitability is clear focus on their role in the value chain – to supply the fuel that enables transportation, relying primarily on location, then brand and finally product innovation to compete. BP or Shell do not need to subsidise the purchase of a car in order to drive consumption of fuel because consumers are ‘hooked’ on it (it gets them from place to place) and there are many credible car manufacturers and dealerships that can serve every conceivable way that people want to travel. The same is now true in mobile devices.

Separation of the service business from handset retail enables operators to focus on the services that are driving the real value on their platforms and optimising the network that may come to differentiate them as data usage ramps up. Although losing the privilege of locking handsets to their network may be frightening, in truth it is no more impactful than number portability in enabling consumer choice.

Furthermore, there are operational advantages for operators in doing away with handset retail. Inventory management and store infrastructure could be streamlined, with a much greater proportion of customer interaction coming through self-service. Call centre interactions per customer are also likely to fall as handset-related queries are reduced.

Following the analogy, the one thing that operators should not do is lose the differentiation that the geographic reach of their network affords them by separating the netco from the servco. Although fuel stations are often clustered around points where there is a large amount of traffic, they do not share facilities as their strength in a location is a key competitive differentiator. This suggests that despite its cost advantages, network sharing may not be a good strategic move for mobile operators.

Moreover, the power of the new wave of handset manufacturers - exemplified by Apple - over the industry would be reduced. No longer would it be down to operators to sell customers on unpopular 18- and 24-month contracts in order to fund access to a handset. Instead, the manufacturer can worry about that retail and pricing aspect, leaving the service provider free to focus on obtaining a share of the increasing data market that would likely result from cheaper access to smart phones.