Could this be the end of subsidised phones?

Could this be the end of subsidised phones?

At present, mobile phones in the UK and US are subsidised by network operators. However, American network AT&T’s CEO has recently suggested that this isn’t a viable solution for the future of the mobile phone industry.

What does subsidising mean?

 Mobile phone networks- including the likes of O2, EE, Three etc. - all subsidise mobile phones. That means that rather than having to fork out hundreds of pounds for the latest iPhone 5s or Samsung Galaxy S4, you get it for free alongside a pay monthly contract.

Although these handsets are advertised as free by networks, they’re not; a SIM only contract offering the exact same package will cost you far less than an ordinary contract which comes with a mobile phone. This means that during the 24-month contract, you are paying the network back for the handset in monthly instalments.

Why subsidising isn’t sustainable

Speaking yesterday, AT&T’s CEO, Randall Stephenson, told investors that subsiding mobile phones might not be the way forward.

He explained that whilst subsiding phones initially, when the network is small and needs to attract users, is vital to a company’s success, this approach is no longer sustainable as a long-term plan.

He stated: “When you’re growing the business initially, you have to do aggressive device subsidies to get people on the network. But as you approach 90 percent penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can’t afford to subsidize devices like that.”

So what will change?

If networks choose to do away with subsidised phones, we could see ourselves having to pay out for a new handset upfront. And whilst this doesn’t necessarily mean you will have to pay more for your handset (as networks currently charge you back for the cost of your phone), it does mean that getting a new phone contract could set you back up to £600 upfront.

Also, if networks choose not to subsidise mobile phones, then consumers would no doubt hold onto their handsets for longer, reducing the frequency in which they upgraded. As a result, smartphone manufacturers would sell fewer phones and the entire industry could go into decline.

Furthermore, if users are faced with having to buy their handsets, we might find that where users could once afford to pay for a brand new iPhone 5s or Samsung Galaxy S4 on a 24 month contract, they will soon only be able to afford a mid-range or budget smartphone at an upfront cost.

Will this ever happen?

In reality, it is unlikely that mobile phone networks would stop subsidising phones, mainly because of the reasons outlined above.

I’m sure that Ofcom, given half a chance, would have something to say if plans did begin to develop in such a way.

But at the moment we can buy valuable entities such as cars and houses on a pay-monthly basis- so why not our phones?

Written by Charlotte Kertrestel

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