Hi Ellisse,

Here is my report for you regarding the impact on revenue and profits for the telecom companies
operating in those markets. In the telecom industry leasing has been available for expensive
equipment to enterprise and business clients for many years, but the concept of offering leased
handsets to consumers is relatively new. As a result of significant efforts to find new revenue
sources, we have started to see operators trialing various leasing options for handsets to consumers.

For subscribers, leasing is a trade-off that lowers the initial cash outlay needed for equipment in
return for monthly payments and an agreed buy-out ‘residual price’ at the end of the lease. For
operators, leasing means higher ARPUs over the life of the contract, both via a financing premium
and lower churn rates during the lease. In effect, the subscriber is paying a premium for not having
to pay the full cost of the equipment upfront.
Benefits
For any operator considering offering consumers the option to lease equipment such as handsets,
there are a number of factors to consider. Benefits to lease handset to both parties:
 For subscribers the most commonly cited reasons for leasing are that it reduces the initial
cost of the device and enables you to keep current with the latest devices using a regular,
predictable payment.
 For operators, the most common benefits cited include the potential revenue increase from
allowing low ARPU prepaid subscribers to use higher ARPU equipment and services that they
otherwise, could not afford.
 In addition, operators cite maintenance savings and increased expenditure from subscribers
because they are able to move the latest equipment and service offerings. Leasing
effectively removes the upfront cost barrier that may have delayed a purchase, or even
prevented the purchase at all.
 Operators also have potential new revenue from financing charges such as interest, and
some have pointed out that leasing tends to yield more revenue than if the subscriber buys
the handset and keeps it for a long time period.
 Other important observations from operators included that offering leasing tends to reduce
the need to offer discounts to attract subscribers, which also had revenue impacts .Inaddition, some
marketing executives pointed out that the end of a leasing contract provided
a ‘trigger event’ for the purchase of new equipment even if the current equipment was
working well.
Trade-offs
There are some important trade-offs that must also be considered by both the subscriber and
operator. The most important is that subscribers should be aware that in the end, handset leasing,
just like any other kind of leasing, ultimately results in the subscriber paying more for the equipment
over the life of the contract. Some countries regulate that the total amount paid over the life of the
lease must be disclosed to the subscriber at contract signing. In some cases the subscriber
specifically initials the amount as part of the contract signing.
The revenue from the handset will significantly be reduced if all the operator provides finance for
the handset, since one of the primary motivations for leasing was to enable subscribers to use higher
value handsets and operator services that are enabled or enhanced by the latest equipment.
The team should further explore the idea of handset leasing for Company X, since handset
leasing has been successfully launched in various developed markets as it will help them to
improve their profitability and it will help them to face the threat posed by mobile virtual
network providers .
ANSWER:
The team should further explore the idea of handset leasing for Company X, as handset leasing has
been successfully launched in similar developed markets, including Singapore, US, and Australia.
The telecom industry is projected to contract by 4% annually between 2018-22, and comparable
telecom incumbents have shifted their operating models towards handset leasing to minimize their
net losses of revenue and shareholder value.
• Handset leasing meets consumer needs by offering
frequent handset upgrades and lower overall costs. − Consumers no longer want to be committed
to their mobile devices for the duration of their 2-year contracts, as new phone models get released
with improved features as frequently as once a year. − The growth in mobile data traffic has driven
the development of 5G networks, and yearly release of new phone models with improved features
has amplified the demand for handset leasing plans.
• Competition from MVNOs is forcing the hand
of incumbents. − Lower priced SIM-Only plans have been introduced by ‘mobile virtual network
operators’ (MVNOs) and gained massive popularity amongst consumers. − Increased competition
from asset-light and low-cost MVNOs has compelled telecom incumbents to engage in price wars
and reduce their prices of mobile services. − As a result, most of them have formed partnerships
with MVNOs operating in their markets, to offer the lower-priced and highly popular SIM-Only plans,
with take up rates as high as 43% for Sprint in 2016.
• Offering handset leasing to SIM-Only
customers is estimated to reduce net losses in revenue from 54% to just 5% − Each conversion of
mobile contract to SIM-Only plan results in estimated net loss of 54% in revenue per customer. −
Offering handset leasing plans reduces the net loss to as low as 5% per customer.