O2 Refresh Throws Spotlight on the Value of Mobile Service

UK Operator’s New Plan Offers a Great Deal, But Is O2 Giving It Away?


O2 launched its Refresh scheme in the UK last week. It says the plan is a new way for customers to buy their phones and mobile service. O2 has split the cost of the device and the cost of the mobile service into a Phone Plan and an Airtime Plan respectively. It claims this makes the total cost of taking out a contract more transparent. Once subscribers decide on a device and sign up to a 24-month contract their bills will have two lines on them: one for the monthly cost of the phone and one for the mobile service.

O2 says its move is a result of research that shows consumers want more flexibility in their contract terms. Subscribers are frustrated of being tied into two-year deals when new phones come out every year. With Refresh, O2 hopes to let customers keep up with fast-paced technology trends.

O2 has been at pains to point out that Refresh is not a removal of subsidies; rather it is a reconstruction of the way customers are billed. One of the small consequences is that subscribers will need to sign two contracts. However, the operator has stressed that the tariffs are exactly the same as its standard post-paid deals.

The most important part of this new plan is that subscribers will know how much they’d have to pay for a phone if they want to change it before the end of a 24-month contract. This will depend on how long they’ve had the phone and how much they decide to pay upfront, and they won’t have to pay off the balance of the Airtime Plan.

Once they’ve paid the balance of the Phone Plan, subscribers can sell their device, pass it on to a friend or relative, or offer it back to O2 through the O2 Recycle scheme. This is the principal difference from O2 Lease, in which customers have to return their device to the operator at the end of the lease period.

If a customer decides to stick with the same device for two years, the Phone Plan ends after 24 months and the contract becomes a SIM-only 30-day tariff. Customers are billed only for the price of the mobile service.

There will be no penalty for switching to a Refresh plan and O2 expects “most” of its contracts to be on the new format within the year.

The move signals a major shift in how O2 sells to its customers. It’s difficult to see why anyone would take any other contract with O2 or — worryingly for its competitors — with any other operator.

I’ve looked at this tariff for a week now and I’m still trying to see what’s in it for O2. I’m sure the operator would argue that more-satisfied, more-flexible customers are happier customers who’ll stay longer with O2. This might be right, but I wonder if O2 is just giving too much away.

Subscribers who arrive at the end of their contract but carry on with the same device and service are called “sleepers” by most operators. They are some of an operator’s most lucrative customers.

O2 will now forgo this part of any deal with subscribers and will come to depend on customers being so delighted with this new state of affairs they stay with O2 and buy another device. But O2 must also be concerned that many will simply drift into the lower-cost SIM-only plan after 24 months. This new flexibility will be the most significant element of Refresh for O2. Fears about customer retention and fraud would have loomed large during the planning.

The separation allows O2 to account for device subsidy differently (and more appropriately) in its accounts and should release subsidy payments from the balance sheet. In future O2 may also choose to securitize the payments and sell them to financial institutions.

I suspect we’ll see similar schemes from the other major operators in the UK within the year but don’t underestimate the work involved in reworking accounting, connection and customer service procedures to make it happen. I suspect this was months, even years in the planning at O2.

Like recent tariff innovations by T-Mobile in the US and KPN in the Netherlands, Refresh will be watched closely by UK and international operators. The outcome is uncertain for O2, but for its subscribers the tariff is a deal that’s hard to resist. It offers much greater flexibility to upgrade — an important point in light of the pending launch of O2’s LTE network in the UK.

It may also lead to an upturn in demand for devices as people take advantage of the opportunity. It could even be a route for operators to finally harness the value in the burgeoning tablet market.

The benefits for O2 are much more opaque. We see the move as a gamble by the operator. More-loyal customers and the ability to see the cost of mobile service may look good in the deep analytics O2 must have employed in the run-up to the launch, but these may not work out in real life. This could be why O2 has limited the initial launch to a few devices and tariffs.

Whatever happens, it certainly puts the building blocks in place for a new relationship that will at last allow customers to appreciate value in mobile once again.