The end of two year mobile contracts; the end of smartphones on contracts at all; the rise of phablets; domination of the market by just two vendors; domination by only a handful of models: All of these are constituent parts of a revolutionary shift sweeping the nation’s smartphone market at the moment. Get ready to upgrade your thinking: The way Australians buy and use mobile devices is about to change massively, and it’s a wonderful thing indeed.
I vividly remember the first mobile phone I bought, and how I bought it.
The year was 2000, and I was in the second year of an IT degree. As part of that degree, I had started a six month placement as a (very) junior IT analyst at PriceWaterhouseCoopers. Suddenly, I had responsibilities. Suddenly, someone needed to know where I was at all hours of the day. Suddenly, I needed to be able to receive and mobile phone calls.
So I did the logical thing: What everyone else did. I headed to one of my local mobile phone shops (in this case it was Orange, reflecting my desire to avoid paying Telstra’s exorbitant prices) and picked up a mid-range Nokia on a two year plan. You can see the model pictured here on the Nokia Museum website. The main feature of the phone, as far as I could see, was that it offered the ability to change out its front and back cover for different covers. Plus, it came with predictive text input, meaning the numberpad would more easily be able to interpret my cryptic SMS messages.
Two years later, Orange offered me the chance to upgrade. But I had made my decision: The company’s network wasn’t up to scratch. So I switched to Optus on another two year contract, with another new phone. This time it was a Sony Ericsson with a colour screen (the Z200). Technological advancement! I was on the up and up. Two years later I was back to Nokia again (the N90), with the network that had been re-badged to Three. Two years after that I switched to Telstra for the iPhone 3G.
If you think about it for a second, what you’ll realise is that most Australians have taken this pattern of smartphone buying more or less for granted for much of the past 15 years. You know the deal: You sign up for a two year contract and you get a new smartphone bundled. As your contract comes to an end two years later, you shope around a little to see who has the best deal on the smartphone you want. Then you sign up for another two years. On and on, the cycle repeats itself.
It’s been a good deal for customers, because they avoid the up-front cost of buying a smartphone, which these days is usually upwards of $500. It’s been a good deal for telcos, because it lets them lock customers into two-year mobile plans. And it’s been a good deal for smartphone vendors because it has created a cycle of demand.
However, there is now significant evidence to show that in Australia, this cycle is comprehensively breaking down.
The first factor in play is that many customers now want to buy new smartphones every year, or even every six months, instead of every two years. Apple’s habit of releasing a new iPhone every September or so has stimulated many Australians into a yearly upgrade cycle. Android fans are even more spoiled for choice, with the likes of Samsung now releasing multiple new phones every year. The past several years has seen intervals of only a few months between the release of the Galaxy S III, the 4G Galaxy SIII, the Galaxy S4 and the Galaxy Note 3, for example — and there are already rumours about the Galaxy S5. Google’s popular Nexus line is also refreshed every 12 months.
The second factor in play is the rise of alternative retailers for smartphones.
It used to be that if you wanted to buy a smartphone, you really had to head to a retail outlet owned by a major telco such as Telstra, Optus or Vodafone. At best, if you wanted more choice, you could try an independent alternative such as the now defunct Crazy John’s, or Allphones. However, now it has become increasingly popular to buy smartphones online from specialist retailers such as Mobicity or Kogan.
Such online retailers sit outside the traditional distribution cycle for smartphones in Australia, getting their stock from international suppliers. Consequently, their models come without much of the telco software cruft and are competitively priced. All you have to be willing to do is to pony up the up-front cost and away you go.
When you couple these online marketplaces with second-hand markets such as eBay, what you get is a subset of Australians who are regularly buying new smartphones, using them for six months or a year and then flipping them off secondhand after that to upgrade to a new model. Often 80 percent or above of the original price will be recovered if the handset is in good condition and the original packaging is intact.
Other factors contributing to the decoupling of mobile contracts and physical handsets has been corporate smartphone rollouts, which has seen many Australians offered a high-level smartphone for their work, and the vibrant hand-me-down scene, which is often seeing Australians pass on their still-capable handsets to relatives or friends in need of a new model that need not be the latest smartphone on the market.
Analyst firm Telsyte said in a statement this week that in 2013, for the first time, less than half of all smartphones in Australia were acquired via mobile services contracts.
Telsyte research found that only 43 per cent of Australians 16 years and older had acquired their smartphone via mobile service contract compared to 57 per cent in 2012. Around 30 per cent of those that acquired a smartphone chose to buy it outright in 2013, with the remainder receiving their smartphone as a gift, as a company phone or as a “hand me down”. Telsyte managing director Foad Fadaghi said:
“The unbundling of handset and mobile service contracts has been growing in popularity as consumers seek new handsets more frequently than the typical 24 month contract.”
Now, there is no doubt that the telcos have responded. The rise of slightly discounted “BYO phone” or “SIM only plans” offered by the likes of Telstra, Optus and Vodafone is a direct response to this subset of serial smartphone flippers. The telcos know that they can no longer offer customers the subsidised smartphone carrot of signing up to pricey two-year contracts, and so are now offering them a slight discount to keep them on board.
However, even this hasn’t proven enough to keep such customers loyal. One factor has been the availability and convenience of prepaid options that have allowed customers to escape mobile phone contracts entirely.
Then there’s also the fact that the rapidly changing capabilities of mobile phone networks encourages customers to keep their options open. A years ago, Vodafone’s 4G network was nonexistent and its 3G network still suffering. Optus’s 4G coverage was still substantially behind Telstra. 12 months down the track, network competition between the trio has increased dramatically as Vodafone and Optus have invested heavily in their networks. Customers who aren’t locked into lengthy contracts have the option to switch and take advantage of new infrastructure in their area.
Over the past six months, as a result, Australia has seen several carriers launch what are billed as “no lock-in” or “month by month” plans, where customers bring their own phone and pay for mobile service on a month by month basis, without needing to sign up to any permanent plan at all. It’s the ultimate freedom and highly advantages customers. But it’s a world away from the two-year, handset-subsidy, lock-in plans we’re used to.
All of these trends point to a revolution in Australian smartphone buying. Suddenly, as a nation, we’re predominantly buying handsets outright. We’re not letting ourselves get locked into long-term contracts any more. We’re getting more smartphones from our employers. And we’re reselling or passing our personal handsets when we want to upgrade, which is every year or even every six months, rather than every two years.
There are also other trends evident.
Telsyte’s research showed that there were about 15 million Australian smartphone users at the end of 2013, an increase of 2.6 million over 2012. But that the smartphone market is increasingly converging into just two main operating systems: Apple’s iOS and Google’s Android. Android remained the leading platform in 2013, with a just over 50 per cent of the installed base, followed by Apple at 42 percent.
Telsyte’s statement didn’t note this, but in the Android segment, what Australia is increasingly seeing is the same trend that is evident globally — “Android” is increasingly meaning “Samsung”, as other vendors such as HTC, LG, Sony and Huawei have struggled to gain much scale against the Korean giant. When Australians talk about smartphones, in 2013 they increasingly mean either one of Apple’s iPhone models or one of Samsung’s Galaxy models — the Galaxy S or Galaxy Note series.
And there are also increasing signs of convergence between smartphone and tablet form factors. When Apple first released the iPhone back in 2007, the size of the phone was dictated by the need to be able to use it with one hand and hold it up to the users’ ear to place calls. The unit — although billed by Apple supremo Steve Jobs as being a “breakthrough Internet communications device” was fundamentally seen as a new type of mobile phone rather than as a mobile interface to the Internet.
In 2014, this is no longer true. Increasingly smartphone users are using their devices primarily as gateways to online services, rather than as old-style mobile phones capable of making voice calls. The popularity of Samsung’s “phablet” Galaxy Note series, with its large screen, is a very solid indicator of this. Steven Sinofsky, the former President of the Windows division at Microsoft, wrote on his influential blog Learning by Shipping in December last year:
“Phablets are normal. Today’s phablets seem like a tweener or oddity to some–between a large phone and a small tablet. In practice the desire to have one device serve as both your legacy phone (voice and SMS) as well as your main “goto” device for productivity and communication will become increasingly important. The reduction in the need for legacy communication will fuel the need to pivot closer to a larger screen all the time. Improvements in voice input and collaboration tools will make this scenario even more practical.
In the short-term, the ability to pair a larger screen tablet with your phone-sized device for voice or SMS may arise in an effort to always use one device, and similarly smaller tablets will be able to assume phone functionality. Design: Don’t ignore the potential of this screen size combined with full connectivity as the single device, particularly in mobile first markets where this form has early traction.”
And in another blog post from the CES conference in Las Vegas last week, Sinofsky pointed out again that the “phablet” movement was trending up: “It was interesting to see the number of show attendees using their really big phones (or small tablets). I would do a quick badge check and noted that more often than not the phablet user was not an employee of Samsung or LG, but just a user. I think this is a trend worth watching. If you have only one device the tradeoff towards a bigger screen becomes interesting.”
While the Galaxy Note is clearly a hybrid phone/tablet, it’s actually not that much larger in size than the most recent class of high-end Android phones. The Galaxy S3, the S4, the HTC One, the Nexus 5, the Sony Xperia Z1 and other models all have screen sizes around the 5″ mark — all substantially larger than the 3.5″ screen found on iPhone models before the iPhone 5 or even the 4″ screen of the iPhone 5 and above. What this increasing screen size signals is that smartphone buyers are increasingly buying models with larger screens.
But what it signals in the long-term, as Sinofsky pointed out, is that we may be headed towards a certain level of convergence of smartphones and tablets. Smartphones screens are increasingly getting larger, and one of the most popular tablet form factors is the 7″ or 8″ models best represented by Google’s Nexus 7 and Apple’s iPad mini. It seems very logical that if smartphone screensizes keep on increasing to the point where the “phablet” form factor gets even more mainstream than it is now, that many people will cease needing to own both.
In late December, Joshua Topolsky, the editor in chief of influential US technology site The Verge, published a thought-provoking essay arguing that modern-day consumers had, over the past two decades, changed their buying patterns as the cycle of technological innovation had become standardised and better understood. Topolsky’s argument was ultimately that this trend was being manifested in every area of society, that technological innovation was forcing every industry to engage in a constant cycle of innovation and disruption as they atempted to upgrade their capabilities.
However, it’s not hard to see that the argument fits very well into the smartphone market, which is actually one of the markets which kicked off this constant ‘upgrade’ cycle to begin with. Topolsky writes:
“No consumer is surprised when Apple releases a new iPhone, and they are rarely impressed these days by a better camera, faster CPU, or elongated screen. This is not special, this is normal. We have now become defined by our penchant and desire for the upgrade. The market has become conditioned by the upgrade. Companies live or die by the upgrade (just ask Microsoft, BlackBerry, or Palm). It is the sun around which the industry of technology orbits.”
In Australia’s smartphone market, ‘upgrading’ constantly is now normal. Our smartphones are getting bigger, thinner, more powerful and more feature-rich every year, and sometimes every six months. Consequently, anything that gets in the way of that constant upgrade cycle — onerous two-year lock-in mobile contracts, vendors which aren’t staying constant with the top-line features or even somewhat overlapping products such as tablets — are increasingly being turfed. Nothing must stand in the way of progress.
In November 2012, I bought an iPhone 5 on a two year contract with Telstra. Yesterday I sold it for most of its original value on eBay, and ordered a new iPhone 5S from an online retailer. I’m about to sell my iPad mini, also for most of its original value, and my Nexus 4 smartphone, and replace them with a larger-screen Android phone — probably the Nexus 5 or the Galaxy Note 3. When my Telstra contract ends, I’m planning to switch to a month by month contract with Optus.
When new smartphones are released in six months or a year, I’ll flip my old models and upgrade to the next ones too. And if Telstra or Vodafone come out with a newer, better, faster mobile service at the right price, I’ll dump Optus and migrate straight away.
Start getting your head around the fact that two-year mobile phone contracts with bundled handsets are dead in Australia. Because if you don’t, you’re going to be left behind with legacy hardware, paying top dollar for gadgets that you could more easily buy and upgrade on a more regular basis elsewhere. This industry has changed. It’s changed for the better, it’s changed more in the interests of consumers, and it’s time we all changed with it and got on board.