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Recapturing territory: Smartphone buy-back one route to better EBITDA

Users want smartphones, telcos want users, top device vendors have the smartphones: ergo the top device vendors - in particular Apple of course - have been able to suck an ever-larger proportion of the profits out of the smartphone value chain.

That’s because the user will pay more on a month-by month-basis for the right phone and that means Apple and Samsung especially, have been able to push up the smartphone price and therefore the up-front money the telco has to pay them to get the desirable smartphones into their network/handset deals.

This is not a new observation. The telcos have been moaning about it from the moment AT&T nailed its historic deal with Apple when the iPhone emerged in 2007.

But while they’ve moaned, they haven’t acually done much about it. There have been a few twists and turns - things like telco app stores and Telefonica’s ongoing programme to develop a Web-based OS which might, in the long run, put all the value back on the network where we all think it rightfully belongs. After all, in an HTML5 world, device vendors like Apple wouldn’t be able to hold users and app providers hostage on their proprietary operating systems.

That’s the plan and in the long run it will probably work (everything balances out in the end) but in the meantime there’s things that telcos can do to reduce that sucking sound of Apple, Samsung and Google gobbling an ever-increasing share of the smartphone profits.

According to Pyramid Research there’s a lot of scope for telcos to simply get more involved in finessing their role in device distribution, particularly the ‘end-of-life’ aspects.

Most recently, as we reported here (see - Softbank to bite a chunk out of Apple's and Samsung's profits?) Softbank (new owners of Sprint in the US) signalled its intent in this regard by buying up Brightstar, one of the world’s largest mobile device distributors. In its position Brightstar has been able to develop all sorts of clever device cradle to grave services that arguably should be undertaken by the telco: things like insurance and device leasing (all highly profitable activities - well, more profitable than ‘racing to the bottom’ on mobile broadband pricing). Most of all - points out Pyramid Research which has just completed a report on it - buy-back and trade-in offerings.

As Pyramid points out “most mobile operators in developed markets are struggling to increase device lifetime values, retain customers and be eco-friendly in a profitable manner. EBITDA margins however, have actually been shrinking.

But in the meantime there is an understandable growing demand for used handsets, particularly smartphones - after all, users who want the best smartphones will consider second hand if the ‘new’ prices are too high for them, rather than buy a dumber smartphone. This and the increasing weight of smartphone subsidies on mobile operators’ profitability has created “fertile land” for buy-back and trade-in programs.

“Through these programmes, mobile customers are encouraged to sell back their old smartphones to the operator in exchange for cash, service vouchers, gift cards and such,” says Pyramid.

Expect to see Sprint get clever with device services such as buy-back. As we covered at this year’s Mobile World Congress, the value of buyback schemes is already well-understood. It’s just that many operators haven’t yet grabbed the opportunity.

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