Bring Your Own Booze- Bundle of Joy

Packaging subsidized handsets could be mobile operator’s ticket to profitability

College students around the world know the meaning of the acronym ‘BYOB’. Often accompanying party invitations, it tells the person being invited to ‘Bring Your Own Booze’.

Indian mobile operators have been practicing a variant with their customers, BYOH, or ‘Bring Your Own Handset’.

These days it seems like everyone want to catch up with services like Internet, voice, mobile social networking, and mobile TV. Double play, triple play and quadruple play offerings are becoming the rule rather than the exception for communication services. This is a growth market but one ruled by cost, with companies competing to win over consumers through price wars and promotions, with all segments largely mature.

So, to cater these services and to avoid price wars operators have come up with a “key” named “bundling” to the unlock the “Convergence lock”.

We all know Product bundling is a marketing strategy that involves offering several products for sale as one combined product. 

Earlier mobile operators stood away from bundling offers - giving handsets and subsidizing handsets, even moving to a model where there was no need to trust a customer: Pre-paid.

But things might be changing.

As Smartphones are coming to market telecom operators are looking to lure customers showing them smart features of smart handsets and smartly marketing their voice and data offers with them.

In March, mobile operator MTS launched a fairly high-end Android smartphone — the HTC Pulse — for the grand price of zero. The catch? Commit to a minimum monthly rental of Rs.1, 500 for a year.

Then, a few weeks ago, Airtel and Aircel both ‘launched’ the Apple iPhone 4 in India (Apple launched it in the US in June 2010), bundled with ‘reverse subsidy’ plans by which the customer could make back almost the entire cost of the handset over time.

Though it’s still early days, this could signal a deliberate shift for operators away from the quarter-on-quarter race for subscribers towards more profitable and longer-term customers. This is significant because most operators are chasing marginal customers who will be loss-making in the future.

“Contractual value is much better than mere transactions. That is a significant shift in the business”.

Operators are now using subsidies to earn money, not to lose it. Take for instance the HTC Pulse that MTS offers free with a year’s plan. Though its MRP is about Rs. 16,000, its cost to company is likely to be at least 25 percent less, thanks to bulk discounts from the phone maker and the ‘channel profit margin’ that phone makers reserve for distributors and retailers, which in this case, comes to the operator. Therefore the “free phone” will cost company, at the most, Rs. 12,000.What it gets in return is a customer who pays Rs. 1,500 monthly and Rs. 18,000 annually, at the minimum. Assuming these new customers stay with operator for at least another year after the offer — an assumption that is neither too ambitious nor common — the offer has a net present value of Rs. 20,000 for operator. In other words, it stands to make that much from each new customer signed this way.

That’s not all. Many customers end up spending even more.

“These offers are designed to attract the heavy users who, after sampling the better user experience and networks speeds, end up crossing the minimum commitments on both minutes and megabytes”.

This is what we can call “A Priority Customer Selection”.

Unlike the past where these offers were designed to attract new customers into the telecom network, this time operators are using them to attract users, who change their phones every two years, consume data significantly and have high ARPU (average revenue per user).

Smartphones are also a cornerstone in operator strategies towards increasing data traffic and revenues.

Facts say that no operator is making money on new voice customers, hence everybody wants to move to data. And for selling data, I expect more operators to subsidize handsets.

Smartphones, thanks to their large screens, fast processors and slick software, are the best way for operators to spur data consumption.

Telecom networks around the world have seen exponential data usage from smartphone users compared to featured phone ones, in many cases, as high as 10 times.

But due to their relatively higher prices, smartphones have not yet become main stream in India. Which brings us to the chicken-or-egg situation the Indian operators are trying to solve: They need smartphones to drive wider data usage among subscribers, but their higher prices mean not enough customers are buying them.

“For tablets and smartphones, bundling is the way forward. Only then can we kick-start their adoption”.

Article dedicated to Steve Jobs who smartly brought the smartphones to the “ i ” level.