As an analyst in the wireless space, I’ve spent years watching the ebb and flow of mobile device market shares. According to comScore, as recently as 2010 BlackBerry led the US smartphone market with a 42% share followed by Apple with 25%; Microsoft had a 15% share that year with Windows Mobile. This year’s market is far different, for sure. For enterprise buyers of smartphones and tablets, keeping up with user requests and preferences calls for a good deal of flexibility, flexibility that isn’t available in the traditional subsidy sales model.
Since the inception of the mobile market in the US, the mobile operators have been faced with a serious business challenge. Cell phones are expensive, generally costing far more than users want to pay up-front. Acquiring customers represents an even bigger cost, so it is a business imperative to reduce churn, the percentage of customers who move their service to another carrier.
The operators addressed these challenges by subsidizing the up-front cost of the phone and making up the difference in the monthly charges. To ensure the program worked, the service was governed by a contract that typically had a two-year term. The customer could keep the phone for longer if they chose, but the contract rate remained the same.
The subsidy plan got dicier when smartphones came along. Now the phones cost several hundred dollars, which necessitated a higher up-front fee. Complicating matters further for enterprise buyers is the fact that smartphones were such a rage in the consumer space that users constantly monitor the manufacturers’ plans to introduce new models, and will put off upgrading their devices if they know the next generation is imminent.
Monitoring the different manufacturers’ market shares, we see this dynamic clearly. Market share numbers are usually released on a quarterly basis. If a manufacturer is releasing a new model in the next quarter, that manufacturer’s market share invariably dips in the current quarter. That same factor also impacts the operators’ cash flows and profits, which will dip before a major new model is released, as the operator has to buy all of those new subsidized units up-front and will “catch up” over the duration of the contracts.
This has a particular impact on enterprise buyers who are responsible for supplying the company’s employees. Each of those popular smartphones typically has an up-front charge of around $200. Their users are monitoring the market like other consumers (possibly more so, because their phones are being paid for by the company), and will invariably hang onto their devices longer when they see a new model on the horizon. When the new model is released, they pounce, and the company is hit with all of those $200 upgrade charges at the same time.
These dynamics illustrate the advantage of the new lease and installment purchase plans. Unlike the traditional subsidized plans, there is typically no up-front cost in acquiring a new device, though with installment purchase plans, the sales tax must be paid up front. At the end of the lease period, the user can upgrade to the latest model or hold on to the current one if a new product release is around the corner. They also have the option to buy their current device at a prearranged price. With an installment purchase, the user (or the company) owns the device outright after the last payment is made.
In the end, with these new plans such as Sprint’s new Easy Pay™ installment plan and 24-month Lease plan, the users can have the devices they want and can upgrade them on the schedule they choose, and the buyers aren’t hit with massive upgrade charges every time a hot new phone hits the market. So users are happier, budgets are more stable and predictable, and the company can potentially lower its mobility costs as well. Looks like a good deal all around.
About Michael F. Finneran
Michael F. Finneran, President of dBrn Associates, Inc. is a consultant and industry analyst specializing in wireless, mobile unified communications, and fixed-mobile convergence. With over 30 years in the networking field and wide range of experience, he is a widely recognized expert in the field. He has recently published his first book titled Voice Over Wireless LANs: The Complete Guide (Elsevier, 2008), though his expertise spans the full range of wireless technologies including Wi-Fi, 3G/4G Cellular, WiMAX, and RFID..
Michael has appeared at hundreds of trade shows and industry conferences and his clients have included: AT&T, Sprint, Foundation Capital, IBM, RIM, Prudential Insurance, McGraw-Hill, and Merrill Lynch.