Should I subsidize or should I not?

We have recently completed a handset strategy redefinition for a major western-europe telecom operator and main findings related to handset subsidy made me ask several times this question: Are clients worth enough to incurr in so high SACs (subscriber acqusition costs) ?

Let me start with the following facts: A) 945 million mobile handsets were sold in 2006 and preliminary calculations put the figure for 2007 higher than 1000 million units; B)  Replacement handsets are slowing down in mature markets such as Western Europe and North America (yearly annual growth of
3-6%)… C)  …although worldwide handset sales are expected to continue growing at a 8.2% CAGR until 2010

Now you an imagine how much money is spent yearly in handset subsidy in Europe, where in mature markets handset replacement renew 40% of the handset base on a yearly basis. Now the question is: Am I, a mature operator in the mobile market, capable of finetuning the huge amount of millions € I regurlarly invest in subsidies? The question is clearly yes, but only if I can measure the HLTV (Handset lifetime value) of my base and check what is the impact of handset migrations in my main KPIs, that is, revenues, churn, ARPU and why not, cost.

But the analysis we conducted unveiled interesting insights as 1) Specific brands that conform the main % of the current handset base (and that require a premium cost as a result of their market share), might not be performing to justify this premium 2) Some brands outperform in specific products and services and might be more interesteing for specific layers of base segmentation and 3) when a brand gets into the “death corridor” the quicker the operator get it out, the best for the overall financial performance. There’s a nice slide prepared by one of my consultants that shows this topic that speaks by it’s own.

The bottom line here is: you’d better start segmenting the base based on client’s value. General subsidy cannot be applied across the base. Subsidize handsets for specific segments with specific traffic patterns. Consider that the traffic patterns will decline in the next years. Challenge the premium cost that some brands are (or were) asking for. Question if the prepaid segment requires the high levels of subsidy we currently see in Europe and lastly, consider the last-minute entrants in the handset arena.

Case any of you, readers, need any additional detail about this interesting project just let me know.

Best. CVA