by Jeff Foster
Sprint 4G Rollout Updates
Friday, March 30, 2012 - 1:09 PM MDT
Prior to the rise of smartphones, carrier loyalty was tied more to network coverage – and for many it still is. Consumers don’t want to worry about signal strength or proximity to a cellular tower in order to place a call. At their most basic level, phones have to work for their primary purpose. In the early days of cellular, there wasn’t much difference between most voice-only handsets.
Of course there were fashion and size considerations, or interest in devices that offered a wider range of compatible accessories, but until six to eight years ago, phones were just phones. Then along came the smartphone, and with it more device styles and functions and a greater range of capabilities.
Then there are those one night stand smartphoners...
Smartphone users are among the least likely to stick with their carrier, and 31 percent of U.S. consumers are ready to switch wireless carriers for better or improved services. Even with the rising cost of early termination fees, carrier loyalty is fragile at best, with only 17 percent of consumers claiming their current network provider is the only carrier they will continue to use.
That startling decline in loyalty is causing wireless companies to rethink the way they do business. In 2011, the average length of relationships between carriers and their under-contract customers fell to an all-time low of 48 months. The trend has been building for a few years and what’s surprising is how quickly it accelerated. In 2010, the average customer-carrier relationship was 59 months -- nearly a full year longer.
The biggest decline came among smaller cell phone companies, but large carriers like Verizon, AT&T and Sprint didn't fare much better. Their average relationships with customers under contract lasted just 51 months. If customers are going to cut and run frequently, carriers will need to rethink their pricing models -- particularly when it comes to expensive smartphones.
I'll glad pay you Tuesday, for that high priced smartphone today...
Is that Sprint yellow, or is it just me?
To get smartphones down to the magic price point of $200, carriers pay an average subsidy of $280 for each device -- four times as much as the $70 average subsidy on a feature phone. Plus, smartphone customers use data, and a lot of it, requiring wireless companies to spend tens of billions of dollars each year improving their 3G network capacity and building out their 4G networks.
Meanwhile, average revenue per smartphone user is actually declining. As data use grows, people are talking on their phones less. The average consumer used just 638 voice minutes per month in 2011, down from 720 minutes in 2010. Customers are cutting back their voice plans, sending carriers' average revenue per smartphone user down to $83 per month last year. That's a drop from $86 in 2010 and $93 from 2009.
How much longer can the industry afford to subsidize smartphones and not receive a loyalty benefit back?
Less loyalty, growing subsidies, higher infrastructure costs and declining revenues have created an unsustainable dynamic for carriers. Profit margins are falling, and analysts expect the trend to get worse.
That means the business model is changing and carriers have few options. First, they can increase prices on their phones. That's already started to happen. Verizon and AT&T now offer a small selection of 4G phones for more than $200, with some as high as $300.
North American carriers have embraced the subsidy model for decades for two reasons: incompatible technologies presented steep obstacles to switching, and the subsidy model seemed to build customer loyalty.
"The mobile industry has reached a point where the economics of the current subsidy model associated with acquiring new and upgrading existing customers to costly smartphones have become increasingly difficult to sustain," said Pierre-Alain Sur, PwC's global communications industry leader.
Now, the whole industry is migrating to the 4G-LTE standard. With loyalty going out the window, carriers may drop subsidies and contracts altogether. Whichever option carriers choose, they will have to act fast, Sur thinks.
"They are going to have to determine what's going to be the business model of the future," he said. "Carriers are at an inflection point.".