Online retailers dangle handset bait, deliver high-ARPU subscribers

Wirefly, the online retailer, is offering mobile handsets at prices that defy gravity.
Tis the season, apparently, for free or low-cost offers on the market’s leading handsets to erode the last bastions of resistance to signing up for wireless service.
The Motorola Inc. Krzr, for instance, hit the market only two months ago at $200, but recently was on offer for $50 with a series of rebates with a two-year contract from Sprint Nextel Corp., which offers it at $200. The Sony Ericsson W810i-the vendor’s latest and greatest Walkman phone for the United States-is free from Wirefly with a Verizon Wireless contract and the ubiquitous rebates. The same handset is $100 at Cingular Wireless L.L.C.’s Web site. LG Electronics Co.’s Chocolate? Free with a contract with Verizon Wireless, which offers it at $100. The BlackBerry 8700g is free as well, with a T-Mobile USA Inc. contract; the carrier charges $250.
What gives?
The situation, highlighted by a frenzy of year-end price-cutting, reflects the leeway that carriers grant to third-party, online retailers to undercut carriers’ offers in order to deliver valuable subscribers at what analysts say are lower-than-average acquisition costs. Online retailers provide needed variety to carriers’ own channels, while not grabbing a big enough share of sales to pose a threat, according to a Cingular executive.
These retailers bring in traffic not just on attention-grabbing, low handset prices, but also by providing thoughtful consumers with cross-carrier data on handsets and service plans for comparison shopping, a key element to the online shopping experience, according to Jupiter Research. With the growth of online consumer shopping, carriers would gain overall by providing similar, cross-carrier data to lure
this traffic to their own sites, according to Jupiter. Meanwhile, the firm projects that the role of third-party retailers is set to grow.
So how did the U.S. mobile market evolve to this point?
“It was a land-grab mentality: sign up the consumer at all costs,” said Mike Gartenberg, analyst for consumer electronics including mobile phones at Jupiter.
Online, third-party retailers provide carriers with a small but attractive channel with lower-than-average subscriber acquisition costs that represents only about 5 percent of handset purchases, Gartenberg said.
“The subsidization of handsets is something that the carriers and handset vendors wouldn’t mind seeing changed,” Gartenberg said. “But when you’ve done such a good job of teaching consumers not to pay much for handsets, even full-featured ones, it’s going to be hard to get them to go back and perceive value in those devices. This is one of the reasons prices keep going down.”
Julie Ask, analyst with Jupiter, said that her firm’s suggestion that carriers provide comprehensive data on themselves and their competitors’ offers has its roots in the automotive industry, where car makers ended up paying unsustainable commissions to third parties to steer business their way.
What’s the carrier angle on third-party, online retailers?
Glenn Lurie, president of national distribution for Cingular, oversees both his company’s e-commerce business, which includes Cingular.com, and national distribution, which includes the third-party, online retailers. Thus, he said, “We have units that compete” but there is “plenty of business for everyone.”
Lurie said that, according to the carrier’s research, the online customer typically comes with a higher average revenue per user, or ARPU, and lower churn behavior-thus their value when delivered by alternative channels.
“We are, without doubt, seeing very profitable customers through these retail channels,” Lurie said.
Cingular, in turn, pays a commission to the third-party online retailer commensurate with the level of service plan purchased by the consumer. These alternative channels can set their own handset prices and typically attempt to “up sell” by bundling those discounted handsets with higher-value service plans, where they make their profit.
Lurie said that, in contrast to Jupiter’s research, the customer acquisition costs of online retailing-cached in terms of CPGA, or cost per gross add-were not necessarily cheaper or overly expensive in comparison to brick-and-mortar walk-ins. He declined to reveal Cingular’s estimate of what percent of sales is secured by these alternative channels.
What about Jupiter’s suggestion that carriers provide online consumers with comparison data on their own offerings as well as those of competitors?
“Not going to happen,” Lurie said.