Wireless Informatics Forum

In 2007 it was the first to launch a 24 month contract in the UK. Now, Orange delivers another UK first, the 36 month (yes, that’s three years!) contract.

There was a time, particularly in Western Europe, when you could snap up a reasonable handset on a 12 month contract. By the end of last year, some operators had scrapped 12 month contracts altogether, with 18 months being the minimum.

The trend for ‘contract-creep’ began in 2007/08 and was a direct result of increasing competition, increasing churn and static ARPU.

The land-grab business models employed by the operators in the early-adopter years of mobile had stuck and consumers had become accustomed to heavily subsidized handsets. Every 12 months the latest handset could be yours for less than £30.

Add this subsidy (typically +£100), to other subscriber acquisition costs (advertising, retail stores, administration) and to subscriber management costs (everything from network maintenance to  putting a roof over the support agents’ heads in the call center), and you begin to appreciate just how tightly margin are squeezed in a 12 month period.

No wonder then that operators had to make changes, not only to their operational efficiency but also to the way in which they acquire and retain subscribers. Cutting handset subsidies, no matter how attractive an option that may be to an operator would, in many markets, be suicide. Not only do they work to attract customers from rival networks but they are also a useful means of seeding the market with the latest (revenue-generating) applications, services and standards.

Appreciating the consumer’s attachment to a subsidised handset, it wasn’t surprising that 24 month contracts became the norm; delivering an extra 12 months breathing space within which the operator could recover their costs and build a more profitable subscriber base.

But what of a three year contract? Too much?

Orange’s public statement reads; “In the current economic climate, the demand for  low-cost monthly plans which include a phone has materially increased. These new 36 month phone plans starting at £5 will provide light users with more choice since currently their only option is a pay as you go package. They are ideal for people who don’t want to go through a top up process, are happy to commit to a contract, want the security of knowing that they won’t run out of credit and who want a phone included in the package.”

Of course, the cynical will read this as an attempt to lock subscribers into lengthier contracts, discourage churn and increase the opportunity for upsell.

My first reaction was horror at the thought of having to use the same handset for three years. Closer inspection reveals that Orange will supply you with a new handset after 18 months. Although by that time, the supplied Nokia 2630 will almost be four years old.

All things considered, I’m not sure Orange’s package is attractive enough to mask the desire to lock subscribers into longer contracts. Yes, £5 a month is probably the cheapest contract on the UK market today but Virgin Mobile will give you twice the monthly minutes, a better handset and will only ask you to sign for 18 months for £8.50 a month.

The total cost of both contracts may be almost identical but if we are talking ‘choice’, freedom, flexibility and, in an age of austerity, the ability to budget and cut costs to reflect changes in circumstances, I’m not 100% convinced that a 36 month lock-in is going to appeal to a great many consumers.

Of course, Orange started the trend for 24 month contracts in 2007 so I wouldn’t bet against the rest of the industry following closely behind.

Although, be warned; in the US, where long contracts are the norm, there have even been subscribers who have died and still been taken to court for not completing their contracts first!

Technorati Tags: orange,36 month,mobile,contract