Two year contract trend could reverse by 2011

Two year contract trend could reverse by 2011

Aggressively priced smartphones and up front payments on hardware could see the trend towards two year contracts reversed by 2011.

Analyst Gartner says it expects 12 month contracts to return to the norm in two years' time, as consumers move away from Sim-only in improved economic conditions.

And there will be more pressure on operators to provide reasonable prices on those 12 month contracts, even on heavily subsidised smartphones.

2009 has been the year of the 24 month contract, with recent figures from GfK showing that the number of customers tied into two year contracts has surged tenfold in one year. Two year contracts represented a 58.5% share in October 2009 - up from 6.8% in October 2008.

The trend for longer contracts can largely be attributed to the rise of more expensive smartphones, such as Apple's iPhone.

Currently, devices that require a high subsidy mean networks seek to lock in customers for two years to claw back cash.

But the price of smartphones such as the iPhone may come down, if the recent trend is to continue. Sony Ericsson and Motorola have already reduced their handset portfolios.

Meanwhile, Nokia CEO Olli-Pekka Kallasvuo said late last year at its Capital Markets Event that Nokia plans to drive down the price of smartphones globally and will halve its smartphone portfolio.

According to Gartner's research, smartphone volumes will represent 14% of total mobile devices sales in 2009, growing by 23.6% from 2008 and to 38% by 2013.

However, the company says this 'positive outlook' could be 'negatively impacted by mobile operators' decision to associate all smartphones with high, flat-rate data plans'. This could increase the total cost of ownership beyond mass market consumer acceptance, Gartner says.

Despite this, Gartner says it expects global ASPs for enhanced phones and smartphones to decline by 3% in 2010. CCS Insight analyst Ben Wood tells Mobile: 'There is no denying that for handset manufacturers, longer gaps between replacements is a challenge. They must try to generate revenue from other sources and make sure they retain their customers.'

Last year, many delayed upgrade because of poor economic conditions and instead used prepay, says Gartner analyst Carolina Milanesi. This will stop after 2010 as the economy improves.

Now, says Milanesi, consumers will start to see more options - 'paying up front, shorter contracts, or higher subsidy because you are locked in'.

She adds: 'Consumers are realising there is no easy ride. They are more aware of the total cost of ownership.'

And with smartphones rapidly becoming mass market, operators will give discounts on tariffs or cashback, Milanesi predicts.

She adds: 'One option might be to pay for hardware. For the operator, it limits the cost of subsidy and secures the customer for 12 months.

But it is now about finding out how much a consumer is prepared to pay for hardware. In China, says Milanesi, China Unicom asks for the whole two year iPhone contract upfront.

'There has been talk of subsidy reducing all around,' she adds, but so far no one has done anything; however, subsidy is something that operators are very aware of.

Milanesi cites the example of where hardware subsidy may turn into services subsidy, as 3 has done with INQ - an option for all operators to add revenues and drive down data plans.

And things could start to change as early as the first half of 2010. Milanesi says: 'The second half of 2010 will see shorter contracts because replacements have not been impacted by the economy.

'In 2011, changes in data plans will mean more variety. Today, smartphones are bought by high-tech users but this is going to change. Operators will have to think about offering flat data at a lower rate and offering services on top.'

Operator source: 'The only way to offer value to customers is to have a longer contract, especially since the market is tight on voice and text revenues.'

T-Mobile retail manager: 'Nothing I can see will indicate a reduction in contract lengths. We are heavily focused on 24 month contracts, but it would be nice to have the choice.'

Independent retail manager:

'People don't mind paying more for longer as they initially get it for less. Everybody is different - there are still loads of 18 month contracts out there and it's good to have the choice of both.'

What do manufacturers need to do to stay profitable?

Analyst comment: Carolina Milanesi, Gartner analyst

Two year contracts are an issue for manufacturers. They need to overcome economic issues and look at the features that go into a device; what do people really want on the handset that they are willing to subsidise?

They should look at how many devices are in a portfolio and try not to compete with themselves. They must leverage their scale to reduce costs.

Nokia is not the first to do this [reduce its smartphone portfolio] - Motorola has done it as has Sony Ericsson. It's the way to go.

Samsung has been bringing absolutely everything to market. I think [reducing the portfolio] will be a rationalisation that may need to happen.

Written by Mobile Today
Mobile Today


The real meaningful trend will be towards prepaid. Customers will pay more for phones to avoid a contract, particularly when the service plan is ...
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