Are handset subsidies wrecking the mobile telecoms industry?

In the battle to attract affluent customers, many European and North American mobile operators have long been lavishing hefty subsidies on the most sought-after smartphones.  Some commentators believe this is highly damaging to operators' business.

The case against handset subsidies is basically this: They encourage consumers to buy a $400-$500 handset every two years, rather than, say, purchasing a $200-$300 handset every three years. That means a disproportionate share of the consumer’s spending on mobile communications is being siphoned off by handset manufacturers. If consumers were spending less on handsets, they might spend more on services, enabling mobile operators to invest more in their networks and relieve congestion.

In parts of Europe, the need for more investment in mobile networks is becoming painfully apparent. In central London, for example, the 3G signal on your smartphone can fade in and out even when you are sitting still, as nearby handsets compete for network resources.  Moreover, call quality, particularly indoors, is sometimes poor.

But handset subsidies shouldn’t be blamed for the state of the mobile networks. Handset subsidies just reflect market reality: The simple truth is that, right now, most Europeans place a higher value on the look, feel and capabilities of their handset than they do on network quality. Even if handset subsidies were made illegal, people would just take out a loan to buy whichever smartphone model they desire. They would then search for the best value mobile tariff they could find. 

The fundamental problem for mobile operators is that handsets are highly visible and highly tangible, whereas wireless networks are not.  But over time the value pendulum will likely swing back towards the networks.  Consumers and, particularly, business people will get increasingly frustrated with patchy or sluggish Internet access, particularly if they are attempting to use cloud services. They will then seek out mobile networks that can offer them better connectivity and they will be prepared to pay a premium for it.

When network quality becomes a competitive differentiator again, investment will surely rise, just as it has in the U.S. market with the race to 4G. Moreover, consumers’ current fixation with having the very latest smartphones may pass as other devices get smarter and electronic screens proliferate. In time, handsets may even become anonymous black boxes that stay in people’s pockets providing connectivity and authentication for whichever device their owner happens to be using at the time, whether that be a tablet, a headset or a pair of sunglasses with built-in displays.

In the meantime, don’t shoot the messenger - handset subsidies aren’t the problem. The problem is perceived value.  Right now, most people will pay a premium for smartphones, but not for smart networks.