As Apple unveils a new version of the iPhone, carriers want to avoid that mistake from five years ago. Vodafone and peers including Telefonica, having started moving away from subsidising smartphones this year in markets such as Spain and the UK, may be compelled back to compete on prices.
The handset will meet such pent-up demand that some carriers will be tempted to offer it at a reduced price to win market share.
That threatens to force others out of their savings tactics, pushing the industry back into a margin-battering discount war.
Subsidies cost European carriers 12 per cent to 14 per cent of their wireless revenue, according to data compiled by Bloomberg Industries.
"Subsidies are not just an old-fashioned practice, they're also a key lever for smartphone adoption,-? said Vincent Brunet, director of mobile at Orange, a unit of France Telecom. "You can expect some increase in subsidies for a quarter or two.-?
Since the iPhone's introduction in 2007, European wireless carriers spent billions of euros to put more smartphones into consumers' hands, part of a bid to get them to browse the Web, send e-mail and watch videos on their handsets.
Customer defections
Forgoing subsidies for the new iPhone, which was scheduled set to be unveiled yesterday at the Yerba Buena Center for the Arts Theater in downtown San Francisco, would mean missing out on most of the customers for grabs.
The new iPhone may sell 10 million units this month alone, according to Gene Munster, an analyst at Piper Jaffray.
One out of every five smartphones sold in Europe is an iPhone, according to JPMorgan Chase. The new model will be Apple's first change to the device's hardware design since 2010, raising anticipation among consumers who have been holding off on buying a new handset.
In Spain, Telefonica started asking new customers to pay a full price for handsets in March. Vodafone followed suit the next month. The companies had been giving the iPhone 4S away for free to lock in customers for fixed contracts. The smartphone fetches about ???600 ($770) in Apple's stores when bought without a carrier contract.
Contactless payments
In June, Madrid-based Telefonica lost more than 200,000 mobile-phone lines in Spain, while Orange won about 30,260 lines, according to data from local telecommunications regulator CMT. Telefonica has a 38 per cent market share, compared to Vodafone's 28 per cent and Orange's 21 per cent.
Orange's Brunet said the company will continue to push subsidies because that's necessary for attracting consumers to trying out new services such as contactless payments. "When there is a big phone release, whether the iPhone or the Galaxy or another, it boosts competition,-? he said.
To win back customers, Telefonica will have to soften its stance on subsidies.
said Andres Bolumburu, a Banco de Sabadell analyst in Madrid.
If the carrier decides not to give the new iPhone away, it will have to come up with a promotional strategy to attract consumers such as Jose Vicente Curiel.
"It would be great to get the new iPhone or even the Samsung Galaxy but I won't pay for it,-? said Curiel, a 21-year- old butcher and an Orange customer. "That's why I don't see myself migrating to Telefonica or Vodafone.-?
Telefonica won't give the new iPhone away for free in its home market, said a person with knowledge of the company's plans. The Madrid-based carrier is trying to keep high-quality customers who spend more, and hasn't stopped providing subsidies for such users, Jose Maria Alvarez-Pallete, head of Telefonica Europe, said in an interview.
Price 'adjustments'
"We are stepping up our efforts to retain existing customers and one way to achieve that is through handsets,-? he said. "If our customers want the iPhone 5, the Samsung Galaxy, a BlackBerry or another handset, when they wish to renew their handset, we will have them ready for them.-?
Vodafone, based in Newbury, England, may make some 'adjustments' to its pricing strategy, including 'specific tactics in some markets' as the new iPhone starts selling, Francisco Roman, chairman of Vodafone Spain, said. Doing away with subsidies is still the company's aim, he added.
Telefonica gained 1.1 per cent to ???11.36 at 9:23 a.m. Madrid time. Vodafone fell 0.3 per cent to 176.10 pence in London and France Telecom added 0.7 per cent to ???10.63
French discounts
In France, new market entrant Iliad has gained some early success by offering inexpensive calling plans and not subsidizing handsets, selling them at full price. The carrier, which operates under the Free brand, gained 3.6 million mobile subscribers, or 5.4 per cent of the market, in its first six months of business, thanks to plans starting at ???2 a month.
That prompted France Telecom, Vivendi unit SFR and Bouygues to start separate discount brands to rival Iliad.
Still, some of the country's phone executives, including France Telecom chief executive Stephane Richard, have said that phone packages with subsidised handsets will continue to make up the bulk of the market. In a similar analysis, the chief executive of Stockholm- based TeliaSonera, Lars Nyberg, said in July that subsidies were here to stay.
In the long run, carriers faced with declining margins and regulatory pressure will look to reduce subsidy costs, Brunet said. That won't stop them from boosting subsidies short-term.
Apple wins
"In these economically difficult times, operators that don't subsidise smartphones are poised to keep losing market share,-? said Peter Braendle, who helps manage about $55 billion at Zurich-based Swisscanto Asset Management. The concern, he said, is that a subsidy war would hurt carriers' profitability.
While carriers' subsidy strategies differ, the party that's sure to benefit is the manufacturer of a hit phone. Apple, which has boosted iPhone sales with every edition of the device, became the most valuable US company ever last month on expectation the next iPhone and new versions of its iPad will continue to appeal to consumers.
"Apple is for sure the most likely winner whatever carriers do,-? Swisscanto's Braendle said. "It's in a very strong position, no doubt.-?
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Source: http://www.timesofoman.com/innercat.aspx?detail=11992
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