Free handsets may be scrapped

The inquiry into handset subsidies by telecommunications regulator the Independent Communication Authority of South Africa (Icasa), based on the concern that the handing out of free handsets ties consumers into contracts that prevent them from switching networks even when offered a better or cheaper service by another operator, is a worrying one, says Andrea Rademeyer, MD of research company Ask Afrika.

Rademeyer maintains that scrapping handset subsidies is shortsighted: "What this will mean is that consumers will have to pay up-front for their handsets in cash. While Icasa has good intentions and aims to increase competition in the industry, this may not be the right way of going about it."

Ask Afrika conducted an opinion poll in early July with 100 contract customers from the three networks: "We wanted to see if the new concept of paying for handsets up-front, along with contract charge reductions, would in fact increase competition, by increasing switching between the networks. We found no significant difference in predicted switching before and after the introduction of the new concept.

"We also wanted to know whether removing subsidies would result in an increase in the percentage of consumers shifting from contract to prepaid, and found that a significant increase is likely to occur as contracts expire. This even though the concept was explained in fairly utopian terms to survey respondents - the whole handset price being subtracted from the monthly contract charge spread over 24 months."

In reality, the new ruling may prove even more unattractive to consumers. It would not be likely that contract charges would be reduced by the whole price of the handset over the term of the contract, simply because consumers only pay for part of the phone in the first place.

The rest is paid for by the network operator based on the assumption that the consumer will spend enough on calls and other services to justify the subsidy.

Johan Ferreira, a research specialist at Ask Afrika, says: "When looking at the current drivers one must take into consideration what the effect on the market will be if this proposal becomes reality.

"Currently the main drivers of the overall delight ratings in the cellphone contract market are products, upgrades and call centre service. When the subsidising of phones is removed, it will have a considerable impact on the product ratings and the whole idea of upgrading will collapse."

Part of the research showed the increasing importance of phone technologies, such as cameras, MP3 players, and 3G-based Internet access.

Ask Afrika business analyst Craig Kolb says: "Our research showed how important technology has become for many buyers. Voice is no longer the only desirable among contract customers. This has clear implications for consumers who would no longer be able to afford the three to four thousand rand they may have to pay to obtain a phone with all the features."

Clearly though, Icasa will want to find a way to increase competition and Kolb believes that removing handset subsidies will have to be subject to an extensive investigation, as it could negatively impact on industry profits, not to mention consumers: "Alternatives such as shorter contracts with higher charges, or hybrids where consumers can choose to pay for part of the phone up-front and still receive the same contract rates, should be considered."

Pointing the way forward, Rademeyer says: "We believe the voice of the consumer should not be ignored as part of Icasa's investigation; consultation with the consumer is essential to the credibility of the whole process. After all, increased competition is the ultimate aim, so that consumers benefit in terms of lower costs and increased variety at the end of the day."