According to a new study released on Monday, the average mobile phone user now easily changes his carrier as soon as his or her second two-year contract is up. This staggering deterioration in loyalty among customers has been causing wireless companies to reassess their way of business and marketing means.
As what was found by PricewaterhouseCoopers (PwC) in the latest edition of its North American wireless industry survey conducted last year, the average time that under-contract customers stick to their respective carriers fell to its lowest ever at only 48 months. The comprehensive study, conducted every year, includes data from all of the region’s major carriers.
The drift has been on set for a few years. What made jaws drop is how fast it accelerated. Two years ago, the average customer-carrier relationship was 59 months – almost a year longer than 2012’s result.
The worst drop came among the smaller cell phone companies, but large carriers like Verizon and Sprint did not get along better either. The average relationship with customers under contract lasted 51 months for them.
“Competition is fierce, and pricing is a key element,” said Pierre-Alain Sur, global communications industry leader at PwC. “That accelerates the jump from one carrier to another at the end of a contract period.”
If customers keep on cutting their contracts and run off to another carrier, wireless companies will have to reconsider in pricing their models – especially when it comes to pricey smartphones.
Companies have been encouraging customers to upgrade to smartphones because the devices bring in new additional income. Plans for premium data storage cost customers who use smartphones an average of about $25 per month, charged by the providers.
However, what they did not expect was the overwhelming costs of keeping smartphone customers satisfied.
To be able to give smartphones at a price of $200, carriers have to pay a subsidy of $280 for each device, which is four times the $70 average subsidy they pay for a feature phone. Moreover, smartphone users hoard data, a practice that pushes them to spend tens of billions of dollars each year just to upgrade their 3G network capacity and build out their 4G networks.
That happens while the profits per smartphone user are falling short.
As use of data increases, people are talking less on their phones. The typical subscriber only uses about 638 voice minutes per month in 2011; that is much lower as opposed to the 720 minutes average in 2010. Customers tend to cut back on their voice plans, giving the carrier an average revenue of about $83 per month last year; showing a considerable drop from the $86 and $93-profit of 2010 and 2009, respectively.
Lower rates of loyalty, increasing costs of subsidies, higher costs for infrastructure and decreasing profits have given the carriers a hardly maintainable business environment. Profit margins are lowering, and analysts do not expect things to get better anytime soon.
That could only mean one thing: major changes are on their way.
“The business model is shifting, so they have to find a solution,” Sur said.
Wireless companies have a few options.
For one, they can increase prices on their phones. In fact, they already started doing this. Verizon and AT&T now sell a few 4G phones for prices higher than $200, with some costing as much as $300.
On the other hand, they can pressure handset manufacturers to lower the device costs. Some may come to terms, but the maker of today’s most popular smartphone – Apple’s iPhone – does not seem the type to bargain.
They can also try to find other sources of revenue. For now, carriers do not take any revenue from the content that goes through their networks. If they can get a part of the app store sales or video purchases, that could be another thing.
Another option is for the companies to go “prepaid” as is popular abroad.
North American carriers have chosen the subsidy approach for many years mainly for two reasons: incompatible technologies presented difficult hindrances to switching, and the method seemed to make loyal ones out of customers.
Now that the industry boosted focus on the 4G-LTE standard, and with the customer loyalty on its way out the door, it is not impossible that carriers drop the subsidies and contracts altogether. They might even try leasing the mobile devices to customers.
Whichever course carriers choose to take, Sur thinks they will need to act fast.
As Sur says, “They are going to have to determine what’s going to be the business model of the future. Carriers are at an inflection point.”