Counting the cost of changing device economics

Telecoms.com periodically invites expert third parties to share their views on the industry’s most pressing issues. In this post, Biju Nair, CEO of mobile device trade-in and re-use specialist HYLA Mobile, reflects on the end of subsidies in the US and the resulting financial implications on service providers

At Mobile World Congress 2016, the changing device landscape in the US was brought into sharp focus. An entire conference session was dedicated to this topic. Device manufacturers, industry analysts, consumer researchers and mobile service providers came together to discuss the impact that the end of device subsidies in the US would have on the rest of the world.

A couple of things are now clear. US carriers have dispensed with the device subsidies model and their global counterparts are likely to follow suit as quickly as they can. Given the increasing cost of smartphones, their motivation is as much about reducing their exposure to high financial outlays at the start of a contract period as it is about meeting consumer demand for greater flexibility, affordability and controlled and predictable device upgrade cycles.

Subsidies out, Early Upgrade Programs in

The US device market is in the midst of major disruption. Most major carriers have moved away from fixed contracts and the device subsidy model. Instead, AT&T, Sprint, T-Mobile and Verizon are all taking part in private leasing programs or ‘Early Upgrade Programs’.  Currently about 25% of the post-paid subscriber base for all four major operators participate in these programs. Soon many of the remaining US customers will upgrade their devices in this way – changing device economics almost guarantees it.

Regardless of how these devices are made available, they still remain valuable assets in their own right. Most of these are carrier assets that can be further resold for additional value and provide a catalyst for more frequent device upgrades and ongoing customer retention. The practice of ‘trading in’ used devices is already having a profound effect on the US device market. In fact, the used device market opportunity for some US carriers is now estimated at more than $1 billion.

US carriers are increasingly using the latent value in used devices to offset the cost of upgrades. Sprint has launched the iPhone Forever scheme that promises the next iteration of the iconic device at no extra cost to a consumer after just twelve months – for a flat recurring rate of $26.39 per month. This is possible because the re-sale value of one year old iPhones is so strong that Sprint can reasonably expect to recover between $200 and $400 for a device in good condition. T-Mobile also has a program called JUMP! On Demand that works along similar lines.

High residual value of smartphones like Apple, Samsung and LG create a very viable and reliable alternative to low end Smartphones in many markets. Essentially, the market for used devices continues to mirror the market for used cars – with consumers essentially covering the cost of depreciation during the initial twelve months of ownership, and then able to recoup some value when they trade-in their old phones.

Furthermore, in some instances, mobile operators can make higher profit margins with Android devices than they can with Apple iPhones

EUPs and the US$6 billion gamble

On the face of things, the Early Upgrade Program seems to tick all the boxes in enabling US carriers to provide the flexibility that their subscribers crave. It is an opportunity for their customers to benefit from the latest smartphone innovation the moment it launches and not get stuck with an older iteration for longer than they deem acceptable. However, carriers must be aware that failing to manage these programs properly could see them risk billions of dollars in revenues.

By taking quarterly earnings reports from the four largest US wireless carriers, we have been able to determine that the four major US carriers currently have as much as $6 billion of deferred revenue risk tied to the residual value of used mobile devices. This deferred revenue is growing rapidly and could almost double to a staggering $11 billion within just two years. With this much deferred revenue risk, US operators need a mechanism to accurately estimate the residual value of devices that come back via these programs. They also need a solution that enables them to plan, evaluate and optimize the potential of Early Upgrade Programs and manage billions of dollars in revenue risk associated with returned devices.

Managing the risk – independent market tracking and data analysis

Ultimately, US carriers need to know the value of used devices at various points in in order to manage this residual risk. With Early Upgrade Programs, operators can only recover their initial investments if they are able to sell returned used devices for more than the outstanding payments which are being waived when the customer returns the device.  Having access to relevant used device market information, overlaid by the analytics solutions that accurately predict the value of used devices over time, with sensitivity to market events will be paramount to solving this problem and ensure operators remain profitable.

For example, with the upcoming releases of the iPhone 7 and even the iPhone 5SE, operators will need to know the impact this will have on the value of older devices such as the iPhone 6 and iPhone 6S. Being able to recover deferred revenues from these devices in a period where they are at a high value is a win-win solution for both the operator and the customer. Customers are no longer tied into an 18 or 24 month plan and can have the latest smartphone out on the market, and carriers ensure they are profitable by selling these used devices for the highest possible price or lowering their costs by reusing them in other areas of their business, such as warranty and insurance fulfilment.

Advanced market analytics and insights will play a critical role for US operators to recover these billions of dollars’ of revenues. Operators therefore need to make the most of analytics solutions that can determine the value of used devices, before it is too late.

Biju Nair is President and CEO at, HYLA, Inc.  As president and CEO, Biju is responsible for the execution and strategy of HYLA’s global business.  He leads the company’s expanding effort to grow the company’s global strategic vision, with a focus on bringing new technology solutions and new business opportunities to the forefront.  He is responsible for all aspects of ensuring the company’s short and long-term goals are realized and that the corporate strategy is secure and engaged.