[kictanet] The dynamics of mobile operator-subsidized laptops

alice alice at apc.org
Thu May 1 11:57:15 EAT 2008



The dynamics of mobile operator-subsidized laptops *printer friendly 
articles <http://www.arcchart.com/blueprint/print.asp?id=462>
2 Apr 2008

/by: Matt Lewis/

*Last weekend, a friend was showing off his shining new laptop – an HP 
machine with Intel processor, 1GB of memory, DVD burner and a large 
15.4” display. Not amazing specs, but it had an amazing price – it was 
free! After checking to see if the serial number had been filed off, I 
learnt the laptop was free from AOL UK, which is now owned by the 
Carphone Warehouse. The broadband provider has a promotion which bundles 
8Mbps broadband with unlimited local and international calls for $50 a 
month. Oh, and they throw in a free HP laptop as well. What’s the catch? 
Well, there isn’t really much of one. The deal locks the customer into a 
two-year contact: a prison sentence for someone like me, but manageable 
for a typical consumer, particularly one that doesn’t already own a PC 
or is looking to upgrade their old one, as was the case with my friend.*

Giving away a free laptop allows a broadband service provider to achieve 
three key objectives in a developed market like the UK, which is highly 
competitive and where household internet penetration is flat-lining. 
Firstly, it provides a differentiated service offering, distracting 
consumer attention away from the price versus speed comparison. 
Secondly, it opens up a new constituency of consumers who have a desire 
for internet access but for whom the affordability of a PC is beyond 
their means. Finally, a free laptop sweetens the two-year contact, 
making consumers more willing to lock themselves into an operator for 
such a long period of time.

Wholesale, I estimate the laptop probably costs AOL about $550. The 
operator will amortise that over the two-year period, but is unlikely to 
be making any margins from the laptop itself, especially when the 
associated distribution and logistics costs are taken into 
consideration. As a bundled offering, margins will come from the plain 
vanilla broadband and VoIP telephone services. However, as the terminal 
provider, unlike its competitors, AOL is in a position to pack the 
laptop full of content, features and services which has the potential to 
take their customers’ monthly ARPU well over the $50 mark.

If these economics sound vaguely familiar, they certainly should. The 
terminal-subsidy-content-and-services-premium model is an established 
aspect of the mobile phone industry. As newer, more powerful and 
feature-rich handsets have come to market, operators proved willing 
subsidizers (often down to zero dollars) in order to proliferate these 
devices across their subscribers base in the hope of reaping bigger 
rewards from the take-up of premium services.

 From last year, laptops started shipping with embedded mobile broadband 
modules –initially for EV-DO networks and subsequently for HSPA. Now, 
all the big laptop vendors have mobile broadband devices on their 
roadmaps and many will be shipping products in 2008. Apart from this, 
the industry has seen a jump in the take-up of 3G data-cards (primarily 
used with laptops) on the back of aggressive promotional activity over 
the last 12 months from mobile operators – particularly those in Europe. 
It is now possible to get a USB data-card and 3G broadband for less than 
$20 a month, with an 18 month lock-in.

By now I’m sure you see where I’m going with this. Now that laptops are 
becoming mobile broadband enabled, does it make sense for cellular 
operators to start subsidising the cost of the laptops as they are 
already doing with handsets, and as some fixed broadband operators, like 
AOL, have started doing?

On one hand, the raw economics make sense. For example, the wholesale 
cost of a Nokia N-series devices or a high-end Samsung phone is higher 
than most basic laptop models. There is also more opportunity to pass on 
support costs to the laptop vendor, something not possible with 
handsets. From the end-user’s perspective, a laptop destined for home 
use will have its value spread across all family members (unlike a phone 
which is only used by one person), augmenting the perceived value and 
increasing the potential for lock-in periods of longer than 18 months. 
The opportunity for service bundling which includes laptop, handset, 
broadband and voice is also compelling.

However, while all this is a powerful service differentiator for a 
mobile operator trying to grab consumer mindshare in a market where all 
operators have identical network capabilities, the ability to boost ARPU 
through a subsidised laptop offering is more challenging and will only 
be achievable by certain cellular providers. Going back to the Nokia 
N-series phone; an operator will be inclined to generously subsidise 
such a device since the multimedia (music, video, camera etc.) and 
navigation features mean a user is more likely to consume data and 
premium content. The same cannot be said for a notebook unless the 
operator, like AOL, has a portfolio of online collateral which it can 
channel the laptop user towards. A few mobile operators do have such 
collateral – Orange is perhaps the best example and has resulted from 
the France Telecom ownership of the pan-European Wanadoo ISP which has 
now been completely re-branded as Orange.

It will be interesting to see how the operator laptop subsidy plays out. 
T-Mobile toyed with such an offering last year in Germany, and 
discussions with two other mobile carriers show they’re not averse to 
such a concept. One scenario is that mobile operators which also have an 
ISP business in a local market (e.g. Deutsche Telekom/T-Mobile in 
Germany, Orange in France and the UK, Telefonica in Spain and TIM in 
Italy) adopt the laptop-subsidy model primarily to keep their ISP 
business competitive. However, as a result, competing mobile operators 
may feel compelled to offer a similar laptop-subsidy package to remain 

Such an eventuality would speed the day when consumers no longer pay – 
or expect to pay - for any of their terminal devices, be it a set-top 
box, WiMAX router, laptop, mobile phone or gaming console.

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