Churn Cutting Could Harm Handset Sales

The growing trend in the USA market to tie customers into longer contracts could have a negative impact on handset sales. Networks in the USA are becoming increasingly desperate to reduce churn, estimated at nearly 30% by the Cellular Telecommunications and Internet Association (CTIA), and locking consumers into longer contracts is fast becoming a key strategy of theirs.

The networks defend the longer contracts, saying that they offer consumers better incentives to sign up - such as free connection, and most tellingly a substantial discount on an upgraded handset after the two years have been served. The notable exception being the newly launched Virgin Mobile, although they do not subsidise their handsets so do not risk loosing money from churn.

However, this move to longer contracts will ultimately have the effect of also cutting handset upgrades as fewer existing subscribers will be in a position to buy new handsets each year. It will probably take another 12-18 months for the full impact to be felt, as the two year contracts are still fairly new with most consumers. It will also conversely lead to a surge in handset sales in 24-36 months time, just about when 3G handsets are expected to be entering the mass market.

While cutting churn, and the associated costs of acquiring new customers will be a benefit to the networks profit margins, it will not be good news for the handset manufacturers or retailers. The handset manufacturers will increasingly have to spend the next couple of years in the US market relying on new subcribers to maintain handset sales growth - and that is dependent on the US market penetration levels catching up with those of Asia and Europe.'"

Posted to the site on 11th July 2002