Free phones still too expensive

Telstra's latest $0 handset offer won't be the windfall that revives an ailing mobile market, even if resellers and vendors benefit in the short term.

Telecommunications analyst Paul Budde, MD of telco consultancy BuddeComm, said Telstra's latest $0 handset offer would not save the company from falling mobile revenues. The government-owned telco on 6 May offered 100 per cent subsidised handsets to new Telstra MobileNet customers spending $30 or more each month.

"I don't think this is going to deliver them more market share and certainly not more profits," he said. "Telstra and its financial advisers for too long have put their future hopes on mobiles. Despite clear warnings, WAP, GPRS, MMS and 3G are not providing them a golden pathway to new revenue streams and high profits."

Budde pointed out growth in new subscriptions was limited, no new revenue streams were coming from data and call charges were going down in a market where competitors such as Optus and Vodafone performed better.

The answer was not to put up mobile phone charges, which could be suicidal in a competitive market. Yet handset subsidies were a blunt tool for milking more out of an existing market, he said.

"We have argued that once such marketing subtleties are required Telstra as an engineering and bureaucratic incumbent will fail. They are good on a one-size-fits-all mediocre level, but won't win in more finely tuned marketing environments," Budde said.

However, Andrew Schepisi, MD for corporate reseller Schepisi Communications, hailed the $0 handset offer as a great opportunity for mobile phone dealers. Schepisi expects to sell more handsets as a result.

"There's no doubt [$0 handsets] will put a spark back into the marketplace. Telstra removed subsidies nearly two years ago now and there was a huge decline in retail sales. It really hurt the industry," he said. "And Optus, Vodafone and so on didn't follow."

Schepisi said individuals and smaller businesses were particularly attracted to low-cost subsidised handsets. However, he saw little correlation between $0 handset buyers and low mobile phone spend.

"It's not just the cheapskates. We get a number of business customers that want subsidised contracts. We signed some of them 18 months ago and it has cost us a lot of grief motivating them to purchase via deferred payment," he said. "[$0 handsets] are worth it in terms of overall spend."

Mobile phone users were used to cheap or free handsets and, faced with full price phones worth $250 or more, tended to investigate other options such as buying second-hand handsets.

"The average mobile phone tends to last 18 months to two years before the battery starts to play up ... It's very difficult to persuade clients to upgrade [at full price]," Schepisi said.

Dean Verberne, GM at wholesale mobile phone distributor Cellnet, said offering $0 handsets could be a profitable play for people spending $40-$100 a month. "If you are on a $20 plan, which is having a phone just for security or something, maybe not," he said.

Verberne was in no doubt the $0 handset offer would stimulate sales but previous free handset offers had created an unrealistic expectation of what was a reasonable price. "If it's worth $599 but you offer it for free people forget what they're worth," he said.

Last year, Telstra ended its free handset offers, which reportedly cost the mobile phone industry more than $100 million a year.

"We've always said we will use subsidies if we see a business case ... to improve yield," a Telstra spokesman said. "We bear the costs, so it's actually good for mobile phone dealers because it will drive further customer acquisition."

The spokesman said the handsets may be sourced from surplus stock but he could not say "definitively" from where, partly because some phones could be sourced directly by third-party dealers.

Although the move was designed to lift subscriber acquisition and therefore revenue, the spokesman could not say what actual gains were expected either in percentage or dollar terms. "There is a market opportunity for $0 handsets ... but we don't provide any figures or forecasts," he said.