Reduced carrier subsidies increase sales of separate smartphones

I always see the Netherlands – my home country – as a small, easily graspable version of other, larger and more important western countries and even the west as a whole. in light of this,’s Arnoud Wokke points to a very interesting report about the Dutch telecommunications market. This reports notes a trend that, if present in the rest of the world, could have serious effects for phone makers.

In many countries, when you buy a smartphone, you don’t actually get the phone for free or for a low price. instead, carriers subsidise the phone (i.e., they buy the phones from phone makers), and recuperate the costs through your monthly bill. This subsidy model is the cornerstone for the success of otherwise expensive phones like the latest iPhone, Galaxy SIII, the One X, and so on. without carrier subsidies, people would have to pay the price of these phones – usually €600-700 – up front, which would certainly negatively affect the sales figures of these expensive devices.

This is where the Netherlands is getting interesting. up until a few years ago, phones here were heavily subsidised. my iPhone 3GS, then only recently introduced, was free with a two-year €30 /month contract with unlimited data. Skip forward two years, and my Galaxy SII, just as new as the 3GS then, cost €149 with a two-year €35/month contract with sort-of unlimited data (speed gets limited once you hit a certain amount of data; I never manage to do so).

Dutch carriers are currently reducing subsidies, so customers have to pay more up front when signing a new contract/renewing their contract. some carriers have even moved to leasing phones, where carriers retain ownership of the phone and you pay a monthly fee. According to market research company Gfk, this is having interesting effects on the market place.

Gfk has seen a sharp increase in the number of people who sign what is called a SIM-only contract (no phone, just the SIM card), and a separate phone. in other words, people are buying their phones separately, and pick a SIM-only contract to match, since this could be cheaper in the long run.

Like I said, I have no idea if the same thing is happening in other countries, but if so, this could have a serious effect on the industry. you see, if people are suddenly confronted with the real price of a smartphone, will they still buy the expensive phones which are so popular today? if they want an iPhone, will they go for an iPhone 4S (€699) or an iPhone 4 (€499)? if they want a Galaxy, will they opt for an SIII (€599), an SII (€419), or heck, an Ace (€209)? Even I had to look these prices up, and was surprised to see the SIII is cheaper than the 4S.

I am convinced all these carrier subsidies have had a very distorting effect on the industry and smartphone sales figures, and their decline or even outright disappearance will, in my view, cause a shift to cheaper smartphones. Sure, an SIII has a faster processor, but next to an SII, will people be willing to pay €180 extra for it?

I doubt it.

if this is indeed a worldwide trend, and it persists, the industry could look very different one or two years from now.