Customer perceptions vs operator perceptions

The launch of the iPhone 3GS has exposed the gap in understanding between customers of mobile networks and the operators of those networks again.

The challenge here is all around the issue of contracts and phone subsidies.

The basic economics here are simple - mobile phone operators work hard to attract new customers to their networks by subsidising phones, and then recoup the cost of this subsidy over the length of the contract.

So back in July 2008 if you upgraded to a £45 per month tariff with O2 you paid just £59 for a 16Gb iPhone with an 18 month commitment.

For comparison a pay as you go (PAYG) (we'll assume with no subsidy) is £390.

So for a 16Gb iPhone you pay £899 on contract, and £390 + call charges on PAYG.

Roll forward 12 months - and Apple, have predictably, launched a new iPhone. Now those same early adopters that moved from 2G to 3G are interested in moving to a new, shinier phone.

Those customers who were on that £45 tariff have now paid £599. Those customers are now being told that to upgrade they have to pay £270 more to "buy out their contract".

Unsurprisingly customers are rather upset at this (as the 3000+ people who have signed a twitter petition).

Now clearly, by the letter of the contract O2 are in the right here - people did agree to an 18 month contract - and presumably, had they chosen to offer a 12 month contract at £45 they would have priced the iPhone at ££329. (though as this is just £61 less than the PAYG option it might have changed the contract vs PAYG sales balance)

While O2 are doing the right thing here from a short term profit maximising perspective - they do risk damaging their long term relationship with their early adopter customers - and while they may be content to maximise profit believing they have no competition due to their iPhone exclusive deal, they should keep an eye out for the iPod Touch - if Apple continue to add features to that device (I'm expecting the speed of 3GS, speakers, microphone, camera and GPS in the next iteration) the incremental value of paying £968 for a 3GS device compared to paying £19.68 for a SIM without a contract to get the same connectivity, and having that in an existing phone and using the iPod Touch.

My recommendation to O2? Offer "early adopters" (those who's contracts expire in Jan/Feb 2010) the ability to upgrade at the same price & contract terms as new customers - invest in those customers and turn the vocal people into O2 advocates and iPhone showoffs - if each incremental iPhone customer is worth nearly £1000 to you, losing £270 in revenue - for every 4 early adopters you treat well need just one incremental iPhone customer as a result of the good publicity.

Comments

[Sandy]

You're just annoyed at being denied a free upgrade aren't you? ;-)

[Matt]

Yep, I'm just bitter. ;-)