Millions of mobile phone users on pre-pay contracts will have to stump up for the full cost of a handset in future after the country’s largest networks made good on their threat to end subsidies for the market’s least-profitable segment.
Vodafone stopped subsidising pre-pay handsets at the end of last week after similar decisions by O2 and Everything Everywhere, which owns Orange and T-Mobile. Customers that do not want to be tied down to a contract will now have to pay significantly more to upgrade their mobile phone. The decision to end the subsidies, which made mobile phones affordable for tens of millions of people in Britain, was made after the telecoms regulator Ofcom slashed the cost of connecting a call between mobile networks this year.
The regulator’s move, which will cut the current 4p connection charge to 0.69p by 2015, was fiercely opposed by the mobile networks, which threatened to offset lost revenue by raising prices and ending handset subsidies at the cheaper end of the market.
The threats were largely dismissed as scaremongering by Ofcom and consumer groups. However the networks argued that ending subsidies was their only option, as revenue derived from wholesale interconnection rates accounted for roughly 10 per cent of overall sales.
They are now intent on squeezing more money out of low-paying customers, who often buy a cheap phone to receive rather than make calls. Such users, known as “glove box” customers, generate little or no profit.
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The situation has been exacerbated by other pressures in the mobile phone market, including a European Union crackdown on the cost of using a mobile phone abroad.
The European Commission will this week introduce new limits on what mobile phone networks can charge customers to access data services when overseas.
• Moody’s, the credit ratings agency, has highlighted the challenge that mobile phone companies face in maintaining their margins given the rising cost of handsets at the top end of the market.
Moody’s said that smartphones had proved a “doubled-edged sword” for mobile networks as the higher cost of putting the handset in a customer’s hand is exacerbated by the need to invest in mobile networks that are able to cope with the increased traffic generated by the vastly more intelligent phones.
Moody’s estimated that subsidy costs for mobile networks have risen by 78 per cent over the past three years. “Unfortunately, service revenues are not keeping pace with handset costs,” said Dennis Saputo, a senior vice-president with the agency.