Impacts of a handset
leasing model on mobile
telcos
May 13, 2010
Following yesterday's post, here's some related thinking on
the impacts on operators of handset leasing.
Handset sales represent around 25% of operator revenues in
a typical European market, but generate only around 5% of
margin. It may therefore be the case that the scenario
described would lead operators to a more profitable
structural model than exists today. Oil companies are
consistently and acceptably profitable, despite being (literally
in some cases) the ‘dumb pipe’ that operators are so
desperate to avoid becoming.
One of the reasons for the oil majors sustained profitability is
clear focus on their role in the value chain – to supply the
fuel that enables transportation, relying primarily on location,
then brand and finally product innovation to compete. BP or
Shell do not need to subsidise the purchase of a car in order
to drive consumption of fuel because consumers are ‘hooked’
on it (it gets them from place to place) and there are many
credible car manufacturers and dealerships that can serve
every conceivable way that people want to travel. The same
is now true in mobile devices.
Separation of the service business from handset retail
enables operators to focus on the services that are driving
the real value on their platforms and optimising the network
that may come to differentiate them as data usage ramps up.
Although losing the privilege of locking handsets to their
network may be frightening, in truth it is no more impactful
than number portability in enabling consumer choice.
Furthermore, there are operational advantages for operators
in doing away with handset retail. Inventory management
and store infrastructure could be streamlined, with a much
greater proportion of customer interaction coming through
self-service. Call centre interactions per customer are also
likely to fall as handset-related queries are reduced.
Following the analogy, the one thing that operators should
not do is lose the differentiation that the geographic reach of
their network affords them by separating the netco from the
servco. Although fuel stations are often clustered around
points where there is a large amount of traffic, they do not
share facilities as their strength in a location is a key
competitive differentiator. This suggests that despite its cost
advantages, network sharing may not be a good strategic
move for mobile operators.
Moreover, the power of the new wave of handset
manufacturers - exemplified by Apple - over the industry
would be reduced. No longer would it be down to operators
to sell customers on unpopular 18- and 24-month contracts
in order to fund access to a handset. Instead, the
manufacturer can worry about that retail and pricing aspect,
leaving the service provider free to focus on obtaining a
share of the increasing data market that would likely result
from cheaper access to smart phones.
What will this do to KPIs of telecom operators? The KPIs most frequently used by analysts for telecom
companies are EBIT, EBITDA and capital expenditure. Under the new guidance the recognition of a right-
of-use asset and a lease liability will lead to depreciation and interest expense (which will be front
loaded), rather than the current (straight-lined) operating lease expenses. This change will result in an
increase in EBIT and even more so, in EBITDA.
‘The new leasing standard could increase EBITDA margins of telecom operators by an average of 2.5
percentage points
Mobile phone leasing is essentially finance, so you can expect to spread the cost of a
£749 handset over a term that suits (anything between 12 and 36 months). There will be
a rate of interest on top of the repayment, but nothing near what you might expect.
Leasing gives you the flexibility to keep or return the handsets at the end of the
agreement, it’s up to you. If you plan to return the handsets, this can open up even
more cost-saving discussions, such as applying residual values of up to 25% against
the expense.
The rental agreement available from Lease Telecom is fully tax deductible, so there’s
peace of mind for your Finance Manager when it comes to your company’s annual
return. Once you’ve decided on your handsets and selected the preferred term to lease
the handsets for, you are now in a position to shop for a SIM only airtime agreement
that suits your calls, minutes and data usage. Business SIM only plans are much more
widely available and can be sourced from us. Unlike network contracts, leasing
contracts do not carry large upfront costs.
So, with your new lease agreement alongside your new SIM only plan, you should find
you are much better equipped in both technological and commercial senses, and for
only a fraction of the upfront and ongoing cost compared to a one-size-fits-all network
agreement. Businesses tend to save £100’s per user when they combine a handset
lease with a business SIM only plan, so if there’s ever a reason to buck the trend from
previous mobile contract renewals, why not take a look?
Additionally, during the Deutsche Bank Media, Internet and Telecom Conference held on March 7,
2017, Tarek Robbiati, Sprint’s chief financial officer, spoke about the benefits handset leasing has
offered to Sprint: “We’ve been pretty good promoting leasing and allowing customers to benefit
from being always with the latest and greatest technology. And as a return to those forms we face
multiple choices available to us either we can sell those phones or we can recycle those phones and
give them a second life. And we have done so.”
Robbiati added that Sprint views leasing as a way to monetize assets multiple times over their life.
As an example, he said, “The phones that we get back are put back into the market for prepaid, with
different types of levels of guarantee.”
https://www.dbs.com.sg/corporate/aics/pdfController.page?
pdfpath=/content/article/pdf/AIO/112018/181121_insights_TPG_may_not_disrupt_attractive_yield_and_
valuations.pdf
