No-frills contracts vital for European operators

9 Jan 2006

The present prepaid mobile boom across Europe has lead to operators adding sweetners such as free iPods and laptops to entice users to contract/billing services in efforts to lock-in consumers to 24-month contracts. However, an analyst report warns that operators should focus on simpler and cheaper call packages if they wish to enjoy any degree of success.

A new report by Current Analysis highlights the prepaid boom currently spreading across Europe as non-traditional mobile virtual network operators enter the prepay fray.

Aldi Talks recorded 60,000 new subscribers in the first week while Simyo Germany has won more than 350,000 new subscribers. In the UK, Tesco Mobile has reached the one million milestone.

Mobile operators are responding by offering hardware such as free devices bundled with iPods and Xboxes to sell their contract tariffs. In Germany and the Netherlands, mobile operators and service providers such as Zack and The Phone House have been offering free laptops and iPod nanos, Tom Tom devices and Xbox consoles to consumers free, in an attempt to lock them into a 24-month contract. These special offers are necessary to encourage consumers to commit. However, this is expensive for mobile operators trying to win new users and 24-months make for a long contract term for mobile users.

The reason for the popularity of prepaid is obvious. Users in the Netherlands actually get more minutes on prepaid for €12.50 per month than they do on contract. Contract tariffs only appeal to the heavy user, whereby real cost savings can be made through high-volume usage.

However, warned Bena Roberts, an analyst specialising in European wireless services for Current Analysis, mobile operators wishing to succeed in 2006 should focus on introducing a fresher contract tariff without frills.

“Mobile contracts in Europe need to be sweetened with additional offers in order for them to attract consumers,” Roberts explained. “This means heavily subsidized devices and additional hardware. This ensures that contract tariffs remain popular in Europe, but the economics behind such a strategy mean that mobile operators need to impose stringent restrictions on consumers. These restrictions confuse and lock in users and make subscriber acquisition costs soar. The contract model needs to move from a focus on hardware to an emphasis on better, simpler calling charges.”

She continued: “So, what is the solution? A new streamlined contract tariff is necessary, one that offers a simple tariff for mobile calling and is not masked in a bundle. Consumers are flocking to no-frills providers, because they understand the offer. There is one price for SMS and one price for voice calls. At present, contracts are masked by several per-minute calling rates, and customers are overwhelmed by the number of SMS/voice bundles or add-ons that be included. They are never certain what they are paying at any one particular time.

“The winner in the contract race will be the mobile operator or service provider that launches the first no-frills, no-long-term contract. Virgin UK’s Pay As You Go DSL (£14.99 sterling per month) is the ideal example of a simple offer.

“Customers do not have a long-term contract and they can cancel at any time, but if they do the first year there is a one-off fee of €70. Unlike existing contract tariffs, customers do not have to pay off the rest of the contract or cancel three months before the end of the contract in order not to be forced into another one-year deal with the operators (Germany). Customers are informed of the penalty at the start of the contract and the there are no other messy hidden charges,” Roberts said.

By John Kennedy