Carrier contracts are getting longer, which no one likes, but Larry Garfield sees another problem they create: lower handset sales.
Oftentimes, different industries have to work together in order for anything to get done. Normally that's not a problem, but in some cases their respective goals are directly opposed to each other. While it may not seem like it, the mobile phone industry and the mobile carrier industry are both fighting for your pocket book, and if one wins the other loses.
Mobile carriers, of course, make their money primarily off of service and subscription fees. In order to get subscribers to sign on, they offer steep discounts on phones they resell but then require long-term service contracts. On the surface that doesn't seem that unreasonable. They need to make sure customers stay customers long enough to recoup the costs of the phone, or more specifically amortize the cost of the phone subsidy over a longer period of time. Recently, however, many carriers have moved from 1 year contracts to 2 year contracts in order to try and stave off customer churn, as customers leave at the end of their contract. The longer a customers stays with a company and the less often they get a new subsidized phone, the happier the carrier is.
That creates something of a problem, however, for the carriers' business partners the mobile phone manufacturers. If you're Nokia, Ericsson, or Motorola, the more often someone buys a new phone the better, since you only make money on device sales, not long-term service agreements. But a two year service agreement, which means no new phone subsidy for two years even if customers stay with the same carrier, is bad news for phone makers, especially when the usual replacement cycle for a mobile phone is 18 months. That means that manufacturers are forced into fewer replacement sales by those long term contracts. That has a ripple effect on the price of those handsets they do sell, which in turn makes phones more expensive to buyers or the subsidy larger, meaning a higher price for service or a longer contract period.
However, it is precisely that high price that is causing customer churn in the first place, if Harris Interactive is to believed. High prices and poor after-sale service means that, whenever the contract is over, customers will and do vote with their feet. The cycle of longer contracts, more expensive phones, and higher prices is in the end self-defeating.
The other lock-in method that carriers use is walled garden data services. That ranges from restricted content portals to deliberately leaving out the customer's ability to, say, create their own ringtones from MP3 or Midi files on a PC and forcing them to buy "branded" content over the air. But that is exactly the sort of after-sale experience that leads to customer dissatisfaction and increase the likelihood that they will take their business elsewhere.
So how can carriers break the cycle, and not torpedo the phone manufacturers upon whom they depend or alienate their customer base? It's a vicious cycle, to be sure. The obvious answer, of course, is to address the reasons that customers switch providers rather than contractually bind their hands for as long as possible. That means lower prices, according to over half of switch-planning subscribers, better minute plans according to a third of them, or better family plans (get the whole family on board, bonus!) according to a fifth of those looking elsewhere. More featured phones are the demand of only one in five switchers.
Just offer the same phones but at better prices for shorter and more flexible contracts? No, that's too simple. Better to beef up marketing to get more customers in and then force them into long-term contracts so that they can't leave than to improve the quality of the offering. At least that's how carriers seem to be thinking lately. Let's hope they come to their senses and try to make customers happy, not bound.
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