European carriers are moving away from handset subsidies, analysts find

handing over money

One by one, the signs point to the decline and perhaps demise of the mobile handset subsidy. Whether it’s Vodafone paying newfound attention to the high-end pay-as-you-go market or regulators threatening to let contract customers walk out in the event of a price hike, there are frequent signs that carriers won’t be subsidizing the smartphones they sell you forever.

In the U.S., this is a new thing. It was only in December that T-Mobile USA announced its abandonment of smartphone subsidies, much to the interest of other players such as Verizon, but in Western Europe things have moved on quite a bit further. In fact, according to new research from Informa Telecoms & Media, almost 30 operators there have already dropped handset subsidies for some or most customers.

What’s taking the place of those subsidies? Leasing and financing plans, such as Vodafone’s Red Hot and O2 Germany’s My Handy schemes. According to Informa analyst Francesco Radicati, this makes it easier for operators to cope with the growing popularity of expensive smartphones:

“The rising cost of devices like the iPhone means operators have to pay increasingly large subsidies to offer ‘free’ phones. Financing allows operators to continue offering phones for a low up-front price without subsidizing them; as an added bonus, it makes it easier to market smartphones to consumers on pay-as-you-go.”

Why does this matter? Partly because it spells the end for lengthy contract lock-in periods — something operators have to consider anyway due to new consumer protection laws in countries such as Denmark — but also because it means a major shift in consumers’ perception of smartphone costs.

Absorbing handset costs into the associated monthly contract payments creates the illusion of the handsets being cheap or even free. This illusion has been handy in some ways — perhaps the smartphone revolution would not have been possible at scale without it — but ultimately it distorts the market.

Expensive toys don’t really come for free, and pretending that they do doesn’t help anyone. Two-year contract terms should not be the norm. Monthly payments should reflect only the service that the consumer gets in return; nothing more. On top of that, the need to absorb more and more upfront handset costs certainly doesn’t do much for carriers’ ability to invest in their networks. If subsidies really are on their way out, then good riddance to them.

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