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Hesse: The device is king, but so is the device subsidy

On Day 2 of the Open Mobile Summit, Sprint CEO details the changing business challenges as smartphones begin to dominate sales

SAN FRANCISCO -- The business challenges wireless operators face today are far different than the ones they faced five years ago, concluded Sprint (NYSE:S) CEO Dan Hesse during his keynote at the Open Mobile Summit. While that may seem like an obvious statement, the challenges Hesse was referring to are different from what you might think. The biggest difference, Hesse said, is that device has become king, and that has fundamentally changed the business models for churn, customer acquisition and device subsidies.

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The device was formerly a factor in a customer’s decision when selecting an operator and service plan, but today it has become the primary factor. The most obvious example is the iPhone, which drove a mass migration to AT&T (NYSE:T), but Hesse said that reams of other smartphones, tablets and other devices are having a sizable impact. If an operator doesn’t have stylish, sophisticated and powerful devices in its portfolio, it can’t bring in new high-end and mid-tier subscribers and it can’t keep its old ones.

“This is probably the biggest overall change in the industry,” Hesse said. “The bright shiny device they want has become a crucial part of the equation.”

This has skewed some of the key metrics in the industry, most notably device subsidies. In order to lure customers and renew contracts, operators are discounting devices much more heavily than they have in the past, Hesse said. A $500 or $600 Android phone might sell for as little as $200 after subsidy, a huge increase over the $50 or $100 subsidies operators offered on voice-centric devices in the past. In exchange, though operators are enjoying lower churn numbers and great average revenues per subscriber, but the trade off isn’t necessarily even, Hesse said.

Customer loyalty is increasing with smartphones, but in order to maintain that loyalty, operators have to keep customers supplied with more and more powerful smartphones every year or so as device technology and capabilities improve. That in turn leads to ever-increasing subsidies for individual subscribers the longer they stay on contract. “The good news, believe it or not, is churn is going down,” Hesse said. “But customers are upgrading within those churn numbers so subsidy costs are going up.”

Increasing average revenue per subscriber from data plans is most certainly a blessing, Hesse said, but that advantage is tempered in part by the dramatic increase of data usage per subscriber. Sprint has offset this by increasing data plan rates for its most data-centric devices, such as its 4G phones, but usage is something Sprint will have to monitor closely to ensure the cost of delivering data doesn’t exceed the data revenues it takes in, Hesse said. While many of Sprint’s competitors have either implemented or plan to implement usage-based pricing plans, Hesse said Sprint is committed to keeping some form of unlimited plan in place because its customers like their flexibility and simplicity, Hesse said.

“You’ve got to watch usage, and we’re watching it closely,” Hesse said. “So far, so good, but it will be a challenge as network tonnage increases.”

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© 2014 Penton Media Inc.

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