How much does that cheap smartphone really cost?

Free back pain with every purchase
Free back pain with every purchase

Today’s post is by Agustin Diaz-Pines of the OECD’s Directorate for Science, Technology and Industry

For years, mobile operators have based their commercial strategies on offering smartphone devices at very low upfront prices. Consumers have become accustomed to commercials such as “free smartphone” or “smartphones at $0 on a two-year contract”. Most of these offers provide devices for free or at very low prices in exchange for contract commitments.

This strategy has proven extremely successful in recent years, as shown by the rapid uptake of smartphones, which exceed 50% in some countries. But how much does that cheap phone cost you? A new OECD report sheds light on mobile handset acquisition models, and provides pricing information from selected operators in 12 OECD countries for 2012.

When consumers sign up for a mobile communication service, they may either bring their own device (BYOD), purchased at the full price directly from the operator or from an independent retailer, or enter into a contractual agreement for a specified period with a mobile operator, which includes a handset at a reduced upfront price.

This is inaccurately described as a “handset subsidy” by most stakeholders, whereas it should rather be  termed as a “bundled” purchase of a handset device. This raises the question of whether the total cost of ownership (TCO) of the device, together with a mobile service contract, would be higher if customers chose a bundled purchase or a stand-alone acquisition of the handset device.

So, are you better off when bundling devices and mobile plans?

In some countries, consumers do not have the choice of buying a bundled discounted handset or not, as some of the most popular smartphones are only made available upon signature of long-term contracts (e.g. three years for the iPhone in Canada until recently, where authorities took steps to make markets more competitive). In many other countries, most mobile plans always include an entitlement to a handset discount – discounts usually being higher for costlier mobile plans – which makes the BYOD option unattractive (e.g. Canada, Italy or Spain). In countries such as Korea, however, the associated handset discounts are relatively small, even for the heavy users, as operators have relied on handset discounts to a lower extent.

For those countries where both options exist, such as in France or the United States, the report concludes that the bundled option (with discounted smartphone) was, on average, between $10 and $20 a month more expensive than the BYOD option. Of course, these differences may depend on other aspects, such as the quality of the network or additional customer service. It is, however, of concern that these differences are not always made evident to consumers.

Finally, in a few countries such as Australia and Italy, operators disaggregate the cost of the handset device in their monthly bills, which empowers consumers by revealing the associated cost of a smartphone.

Do prices for smartphone devices influence the OECD mobile pricing statistics? The report addresses whether smartphone prices are likely to distort OECD mobile voice and data price benchmarks (pdf). It does so by  mapping mobile service prices and a popular smartphone device (iPhone 4S 16GB) and estimates the total costs over a three-year period.

For mobile services, consistent price benchmarking is only slightly affected by the presence of bundled discounts for popular smartphones. In fact, costs expressly associated to smartphone ownership only account for between 6% and 24% of the total cost of ownership, depending on consumption patterns. For example, explicit mobile handset costs only represent 11.44% ($9.67 in purchasing power parity terms) of the total cost of the 300 calls plus 1 GB basket ($84.51). For some countries, however, part of the handset cost is included in the mobile plan.

Basket of 300 calls + 1GB, including VAT, per month, February 2012

mobile comparison

This does not translate into substantial changes in country rankings. In fact, when comparing rankings before and after adding handset costs, within a set of 12 countries, changes of more than one position only took place on two occasions in 36 data points, with the rankings remaining unchanged in 19 other data points.

In 2012, in France, the new entrant Iliad (Free Mobile) launched a financing scheme for smartphones, which permitted customers to decouple  mobile service contract and smartphone purchase. This revolutionised the way French subscribers purchase smartphones and showed the benefits of increased transparency and switching capacity.

In Canada, in 2013, the new wireless code addressed existing concerns by Canadian subscribers, such as the length of wireless contracts or cancellation fees. Canadian customers will now be able to terminate their wireless contracts after two years without cancellation fees, even if they have signed on for a longer term, have their cellphones unlocked after 90 days, or immediately if they paid for the device in full, among other issues such as data roaming caps.

In other countries, such as the Netherlands, carriers are reacting to quickly changing competitive pressure and smartphone usage boost. For example, the cost of KPN’s offer “Bell-SMs-Web SO 1500”, which included 1500 SMS and 1GB of data, was around $120 in February 2012. The cost of an equivalent bundle in February 2013 decreased to $65.

Smartphones play an important role in the development of the Internet economy. 3G and 4G mobile networks, together with the rapid adoption of smartphones, have facilitated mobile broadband uptake. The bundled sale of a smartphone device, with a significant upfront discount together with a mobile communication plan has played a substantial role in users taking up or upgrading their smartphone devices at a faster pace.

Both the mobile ecosystem and consumers can benefit from these practices by reducing consumer lock-in (e.g. by purchasing smartphone through monthly instalments), increasing transparency (e.g. by disaggregating the cost of a smartpone in the monthly bill) or promoting handset unlocking, which could stimulate switching. Consumers can still benefit from the bundled purchase of smartphone devices as long as they are sufficiently informed and empowered to compare different mobile plans, including quality and prices.

At the end of the day, it’s all about competition and consumer empowerment

Useful links

OECD Broadband Portal

Vicious fallacy or 21st century skill? Listen to the Insights podcast on arts education and find out

Art for Art's SakeA new OECD study, Art for Art’s Sake? The Impact of Arts Education, looks at whether teaching the arts has any benefits other than helping children to become better at drawing, singing, dancing, acting or whatever activity is taught.

The title comes from an article by Théophile Gautier who used the expression “l’art pour l’art” in the Revue des Deux Mondes in 1847.

Baudelaire agreed, and criticised the “heresy of teaching”:  “Une foule de gens se figurent que le but de la poésie est un enseignement quelconque… La poésie (…) n’a pas d’autre but qu’elle-même.” (A crowd of people imagine that the purpose of poetry should be some kind of teaching… Poetry’s only purpose… is itself).

An editorial in The Art World on the other hand attacked the “fallacy and viciousness” of Gautier’s theory.

The debate will no doubt go on for a long time to come. In these interviews, report co-author Stéphan Vincent-Lancrin looks at the evidence from hundreds of studies carried out since 1950.

You can download the podcast in English here

Vous pouvez télécharger le podcast en français ici

Useful Links

Arts education in innovation-driven societies by report co-authors Stéphan Vincent-Lancrin and Ellen Winner on the educationtoday blog

Emerging middle class blues

Exit, voice or loyalty?
Exit, voice or loyalty?

Today’s post is by Helmut Reisen, former Head of Research at the OECD Development Centre and author of the Shifting Wealth blog.

How is life? You might have expected the urban middle class in Brazil and Turkey to answer that well-known OECD slogan with “We can´t complain”, to paraphrase a recurring refrain in Hans Magnus Enzensberger’s 1964 poem Middle Class Blues. After all, the recalibration of the world economy toward the emerging countries, mostly as a result of superior prolonged growth in the Asian giants China and India, has since 1999 helped move roughly half a billion people above $2 a day, the median income poverty threshold in developing countries. Homi Kharas´ estimates for the OECD Development Centre projected almost 70% of the world´s middle class consumption – $56 trillion by 2030 – to be outside the OECD. No wonder then that the term “emerging country middle class” has been driving big dollar signs into many eyes.

Yet, the urban middle class youth is in revolt in Brazil, Turkey and other fast-growing countries. The controversy around Easterlin Paradox, a key concept of happiness economics, suggests that happiness grows more slowly than incomes. Leaders in many emerging countries are today confronted with a dilemma that reflects the dual rural-urban structure of their large societies. While the internet-savvy young urban middle-class has left poverty behind and demands voice, participation and efficient public services, there still coexist the poor in the rural hinterland striving to leave individual poverty behind.  

Exit, voice and loyalty, the late Albert O Hirschman´s intriguing basic categories that drive societal change, can be used to better understand the current conundrum. Loyalty, through adherence to a political party or to religion, can block change but is waning. Exit and voice have different potential in a rural-urban context: exit from the rural to the urban sector is a preferred option for the rural poor but is mostly a one-way street; whence voice as the preferred option for the urban middle class.

Much of the emerging-country middle class is fragile. Lousy education, poor health and urban congestion are the biggest risks to the lower strata of the middle class, by way of social and economic exclusion. A higher proportion of middle-class citizens translates into higher prices for private schools, hospitals and transports or, alternatively, overcrowding. The private provision of quality public services is a socially dividing, hence limited, costly option. In other words, exit to private education and health services – an option for the “happy few” – will raise prices to the point that it triggers voice while the size of the middle class rises.

“First-world soccer stadiums; third-world schools and hospitals”, was one of the slogans advanced by Brazil´s protesters. Brazil has already spent more than $3bn, three times South Africa’s total four years earlier, and only half the World Cup stadiums are finished. Public health spending occupies a mere 4 per cent of GDP in Brazil (despite a constitutional declaration for universal health care rights), compared to 6 in Turkey and 7 in the OECD on average. The latest PISA test scores rank Brazil 57th out of 65 survey countries for mathematics, Turkey is ranked 43rd. These numbers suggest that there is a political and social premium on best practices in the governance and allocation of public spending of tax receipts. Apparently, that premium has not been reached.

Emerging-country leaders might ignore the insights of the OECD Latin American Outlook 2011 at their peril. The policy recommendations put forth there rightly emphasize the need for “fiscal legitimacy”. To avoid the emerging middle class blues, public finances need to strengthen the social contract, provide better opportunities for the vulnerable people and better quality public services. Middle-income citizens are more willing to pay taxes for services, such as transport, health care and education, if they perceive them to be of high quality and if “white elephants” – trophy public investments with little social value – are avoided.

It is quite likely that the current protests, while destabilizing and weakening the affected governments in the short term, will be the start to stronger democracies and strengthen, rather than weaken, the rise of the emerging countries. As Susanna Vogt reminds us, Aristotle reflected “that the best political community is formed by citizens of the middle class, and that those states are likely to be well-administered in which the middle class is large […]; for the addition of the middle class turns the scale, and prevents either of the extremes from being dominant.”

Useful links

What the BRICS need: Education, employment, equality, and soft infrastructure by Helmut Reisen on OECD Insights

Economic Policy and Social Affairs in the BRICS  by Helmut Reisen, SGI and the Bertelsmann Foundation

OECD Development Centre work on poverty reduction and social development