Smartphone subsidies threaten the operator bottom line

Customer loyalty is at an all-time low. Customer churn, the number of mobile customers switching providers every year, reached 44 percent last year, the highest level ever.* When operators need to replace churning subscribers, they incur another round of acquisition and retention costs, so subscriber churn has a direct impact on profitability in all markets, and the trend is even more pronounced in markets where handsets are heavily subsidized**.

Subsidizing the latest and coolest smartphone models has in fact become a common way for operators to attract and retain customers, especially in mature markets. This has fuelled the success of smartphone vendors (Apple’s overall profit margin is now approaching 30%!), but the same can’t be said for operators.

Subsidization is a real drain on operator data revenue. Vodafone provides a case in point. Their OPEX figures, for Q1-Q3 2011, show that while other expenses decreased, ‘acquisition and retention costs’ were up by 12.4% on the same period in 2010. As revenue growth was flat, this led to an unhealthy 3.2% decline in EBITDA.***

Vodafone is not alone. Let’s face it. Offering smartphones is not a sustainable way to retain and acquire customers, and operators are now starting to fight back. Verizon has announced that it will start charging existing customers $30 to upgrade to a new phone. Sprint added a $10 surcharge on 4G rate plans and later extended it to all smartphones. In Europe, Spanish operators like Telefónica and Vodafone have announced that they will stop subsidizing handsets for customer acquisition.

There is another option, one that is proven and profitable, and that is to provide an excellent experience throughout the customer journey. The numbers speak for themselves:

A market-leading mobile operator in a growing market uses reporting & analytics solutions from our Customer Experience Management offering to identify data users who have 3G capable phones, but who are using a 2G network. With this insight, their marketing department is able to take action and offer a 3G up-sell to those customers who are using over 200MB per day over the 2G network. This has resulted in a threefold increase in data ARPU, so the business results have been impressive. Also, as customers are happier, they are likely to stay longer with the operator.

Using our reporting & analytics with device management solutions, another customer was able to identify in just 6 weeks as many as 1.2 million subscribers who had the wrong device settings. After this operator sent the right device settings to impacted subscribers – over 445,000 people, most of them on a prepaid contract – 97% of them started using data. This translated into an impressive 85% increase in data ARPU, thanks to automated and proactive problem solving.

So with the right offering and right quality at the right time, personalized for the subscribers’ needs and provided proactively, automatically and in real time, operators can make their customers feel special, make them stay — and make a profit.

* Strategy Analytics “Wireless Operator Performance Benchmarking, Q4 2011,“ (April 2012)

** Nokia Siemens Networks Operational Efficiency Benchmark reports (2011)

*** Wireless Intelligence, Q4 2011

This post is by Iris Heinonen, head of CEM marketing, Nokia Siemens Networks.