Mobile phones as fashion
Great business for some, not so good for others…
The market for mobile handsets is probably one of the most dynamic in the world as a result of
rapidly changing technology and very short product life-cycles. This situation is exacerbated by the
behaviour of the mobile phone networks which are the primary customers for mobile handsets. To
see this in action look at the UK's mobile network brand O2, owned by the Spanish company
Telefónica. O2 is dependent on the release of new mobile handsets like the Apple iPhone 4S to
increase customer lock-in.
Just under half (49%) of O2's customers are on contract whilst 51% are on a pre-pay system.
Superficially contracts seem highly attractive to customers, especially the young, as they can spread
the price of buying the handset over the contract period. They are therefore often unaware of the
true cost of owning a fashionable mobile. By enticing customers to upgrade to the latest trendy
handset O2 not only increases its revenue but locks customers into a new contract that is binding
for a period of either 18 months or two years. To tie-in as many customers as possible to long-term
contracts is vital to O2 as one of the big problems for mobile networks is the rate of customer
churn. Churn is the percentage of subscribers who do not renew their service plan, and mobile
phone networks have much higher churn rates when compared to other parts of the telecom
industry such as broadband supply. This attrition rate is one of the key metrics used to measure
the business. The yearly churn rate for O2 is 3.1%. This may seem reasonable for a mobile phone
network but this figure can vary very quickly because of pressure from competitors. At the
moment one of the difficulties O2 is facing is that they have a competitor offering a subscription
plan that includes unlimited Internet data. O2 doesn't offer this and for some subscribers this is a
good enough reason to switch mobile networks, thereby increasing O2's churn rate.
One of several factors which have created this churn problem is that mobile phone networks have
grown their customer bases by continually pushing handset manufacturers to produce new
models, then offering these latest models to entice and lock-in customers. As a result the
particular model of mobile phone carried (or flaunted) is identified in many customers' minds
(especially the younger age groups) as a high status fashion accessory. To possess a mobile phone
that is more than two years old is considered so passé as to be antediluvian. I take a contrarian
view on this: my mobile phone is cheap, robust, practical and good for making and receiving phone
calls. That's all I ask of it and the fact that the model is 10 years old adds to its charm. In a roomful
of eminent business people it can often become a point of conversation if I happen to pull it out of
my pocket. To be involved in international marketing and not have a smartphone is considered
perverse. I console myself with the fact that my battery lasts more than ten times as long as those
smartphones and the cost of my mobile service is ten times cheaper. If one spends as long as I do
online, the last thing one wants when travelling around is to be connected to the Internet.
Fortunately for my mobile network provider I'm not the typical customer.
The O2 brand demonstrates how important having the latest fashionable all-singing- all-dancing
mobile model is for a network. O2 was the first company in the UK to secure rights to market the
iPhone which was made exclusively available to its customers from November 2007. Today, O2 has
many customers, the later adopters, coming to the end of their original iPhone 18 month and 2
year contracts. So you can appreciate how crucial it is for O2's revenue that a new model of iPhone
becomes available very soon. Look at the data on the right hand chart to see the effect the last new
model had on O2's ability to get customers to upgrade. During the first three quarters of 2011 the
growth in upgrades declined, producing minus figures. Then, on 14th October, 2011, the iPhone 4S
became available for O2's customers and there was a sudden positive 35% growth in upgrades in
this last quarter.
Planned obsolescence, or an annual model change, designed in order to increase product sales is a
very old marketing technique which probably originated when clothes first became fashion objects.
Alfred Sloan, the U.S. head of General Motors, used this method to grow car sales at GM in the late
1920s. Clever advertising meant it wasn't enough to just own a well-engineered car; the smart
social set had to be seen driving the latest most fashionable model. This is just what Apple is doing
today. The original iPhone was introduced in 2007; the iPhone 3G came out in 2008; the iPhone
3GS appeared in 2009; the iPhone 4 was presented in 2010; and the current model, the iPhone 4S,
was launched in the last quarter of 2011 in time to boost those important upgrades for O2.
Undoubtedly producing the iPhone, with its annual iterations, is a great business for Apple. The
company has made huge profits and is now positioned as one of the most valueable firms in the
U.S. The number of iPhone sales shown in the left hand chart demonstrates just how this has
transformed their business. The yearly model change of iPhones has also been good for O2, as the
contract upgrade chart on the right shows. But spare a thought for the Hon Hai Precision Industry
Co., which you may know under the trade name Foxconn. This is the Taiwanese-owned company
whose factories, based in China, actually make the iPhones. This incredible organisation is
estimated to produce 40% of the global production of electronic goods for the world's top brands.
Understandably the company has come under increasing public pressure from outside China to
improve the harsh working conditions of their, mainly young, workers, and to raise the low rates of
pay. But while the extraordinary success of the iPhone sales have helped grow Foxconn's business,
actually producing that number of iPhones has made nowhere near the profit that Apple has seen.
In 2009 Foxconn managed to make $39.6 million profit but in 2010 they made a loss of $219.8
million on a $6.6 billion turnover producing amongst other things all those ever-fashionable
iPhones. Desirable iPhones that the Foxconn workers can only dream of owning.
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