Despite a raft of new measures from retailers, box breakers are not ready to hang up their gloves just yet.
However, a firm set of rules has been put in place by retailers such as Argos, which could lead to a significant fall in box breaking over the coming months.
Argos’ box-breaking measures, introduced in January, have seen activation rates on prepay phones soar, showing that the problem could be reduced.
Argos’ prepay phones have had an increased activation rate of around 80%, up from 30% last year. The rise comes after a crackdown in January, which saw it rule that mobile handsets could only be sold with airtime, with only one given out per sale.
The measures have proved effective, and operators declared a renewed confidence after pulling back in 2009 following a spate of earlier box breaking at the retailer. Argos had been hit, particularly after the demise of its biggest rival, Woolworths, in 2008.
Box breakers damage the ‘activation rate’ on prepay phones sold through a retailer – the measure is used by operators to identify whether customers who buy subsidised handsets remain on the network.
Balance is key, but the issue prompts a tug of war between operators and manufacturers, with retailers caught in the middle.
Manufacturers are keen to sell as many handsets as possible, and big companies that want to buy devices in bulk give them that volume. They do not see it as their problem if the handsets are box broken.
Meanwhile, the networks exercise caution over volumes because they want to guarantee that as many handsets as possible are activated.
Strategy Analytics’ Phil Kendall says: ‘To a certain extent, operators don’t care about the handset – it’s about getting the Sim card activated and used.’
He suggests that operators take prepay subsidies away to ‘limit the margin that box breakers could make’.
Kendall adds: ‘If operators buy handsets for £15 and sell them for £5 then it will happen. If you are going to subsidise, you should put credit with the phone.’
Neil Mawston, Kendall’s colleague, agrees: ‘For box breaking, profit margins must be smaller than they were in the past. It’s never going to go away – it’s been around a long time and it happens in other markets – it is not unique to handsets.’
He says: ‘People buy cheap subsidised phones and put them on eBay. However, it has become more difficult recently after networks cut back subsidies in the recession.’
However, Mawston warns: ‘Operators could remove subsidies but then people might not buy the prepay phones. It’s about limiting the losses rather than stopping it all together.’
Despite measures to ensure handsets are bought with airtime, operators do not set the pricing.
One source tells Mobile: ‘We don’t set the pricing. They pair Sims with handsets, which means they can still be bought at a low price. There is still a lot to be done.’
When networks subsidise prepay phones they do so in expectation of generating revenues from the sale of their top-up vouchers. In an attempt to guarantee that only their top-ups will operate in the phones, they lock the phone onto their network.
However, it is an easy task for dealers to unlock the phones so they will operate on any network. The phones can then be sold as contract phones, earning a tidy profit from the connection commission. In many cases, the phones can be exported to the emerging markets such as India where there is high demand.
For operators, it is an ongoing struggle to prevent this. Meanwhile, retailers are tied as they need operators to increase volume to match the manufacturers’ goals.
‘The potential for box breaking is always there,’ one senior operator source says, adding: ‘We know that box breakers will take the opportunity for pounds for handsets. You need to be mindful about your pricing, but you still have to be careful. That sort of control [Argos has introduced] is welcomed.’
The source admits: ‘We had some concerns a year ago but they have been dealt with. The steps applied [by Argos] appear to have made a difference.’
However, he adds: ‘Operators have to be cautious. We have seen definite improvements in connection rates. We look at increasing volumes where there is quality.’
Box breaking can happen anywhere, and all the retailers have had problems at one point or another.
But supermarkets and low-cost retailers – or ‘unassisted sales’ channels where a sales person does not assist the sale – are a problem for the networks because ‘handset prices are very low, so box breakers will enjoy themselves’, according to the senior operator source. These ‘unassisted’ channels include the Tesco stores where there are not ‘phone shops’.
Who’s at risk?
Who is most vulnerable? ‘The supermarkets have a different criteria to Carphone Warehouse and Phones 4u’, says Kendall, adding: ‘It’s about shifting boxes – they are motivated to shift as much as possible.’
Networks will make sure the phones sold directly in their stores are bought with airtime, which can deter box breakers, as they would effectively pay the subsidy through the top-up. They will demand that this is done through their indirect stores, such as Carphone and now Argos, too.
In addition, Carphone and Phones 4u limit phone sales so customers cannot buy more than two handsets at a time.
However, some retail chains may have different concerns; while some are working with the networks, others see it as a major profit opportunity. A phone can be purchased for as little as £4.99, but be unlocked and then sold for £25 or more.
The operator source says: ‘If supermarkets are putting handsets out at £5, there will be box breaking. You can’t pick out a retailer who is good or bad. All of the old ways of doing business are still there. I think all of the old tricks are still there.’
No matter what retailers do, they cannot eliminate box breaking. But buying one handset at a time will restrict them, says Mawston.
He adds: ‘On the retail side, they can limit the number of devices, from wholesale they can limit the incentive and retail structure. They can also update systems with people’s names.’
As one operator source sums up: ‘It’s dealing with it, controlling it and trying to find a balance, and being happy with the connection rates that you see. To increase volume there has to be quality. It is not ultimately controllable.’