The Economics of the Football Phone

In this business it’s hard not to get seduced by the never-ending succession of all-singing, all-dancing high-tier phones, but it’s important to keep an eye on the low end of the market. Basic, inexpensive phones still account for the vast majority of global mobile device sales and even in mature markets they make up a significant proportion of sales. You only have to look at the intense price war at the bottom end of the UK prepaid market to see how competitive it is. Market leaders Nokia and Samsung are currently battling with each other in the major supermarkets with phones that cost a mere £4.99 (Nokia 1208 and Samsung E1120).

A couple of weeks ago there was an offer in the UK’s best-selling daily newspaper, The Sun, which has an average circulation of about three million copies a day. In conjunction with mobile network operator O2, retailer Carphone Warehouse and phone-maker Alcatel, the newspaper was offering an Alcatel OT-206 “England phone” as part of a promotion linked to the forthcoming FIFA World Cup.

Although the headline price for the device was £9.50, this included £10 of air time from O2, so buyers were effectively getting a credit of £0.50. People taking up the offer did have to collect four tokens from the newspaper (which costs £0.30 a day), but in most cases they’d be buying it anyway.

So how on earth can such a deal work? I know that phones are getting cheap, but “giving them away” would appear to defy common sense. It should also be noted that this isn’t the most basic phone available — it has a colour screen and FM radio. On top of that, it must make sense because it’s not the first time such a seemingly attractive deal has been offered — The Sun and Alcatel tied up in October 2009 for a similar promotion.

By my reckoning, everyone involved in this deal benefits. I should point out this is my hypothesis rather than the actual business model, which remains shrouded in commercial confidentiality.

For The Sun, the phone helps drive up circulation and with that comes an opportunity to charge its advertisers more while the offer is running. Furthermore, it’s a lot cheaper than the costs associated with offering an insert such as free DVD. All The Sun has to do is print the vouchers and let someone else (Alcatel, Carphone Warehouse and O2) worry about fulfilment.

For O2, which probably put in the lion’s share of the money to make this offer possible, the incentive is new connections on its network and revenue from people who keep the phone and continue to top-up the air time. It will have calculated the likely conversion rate for additional usage over and above the original £10 of air time (which of course only costs O2 a fraction of that amount to offer). O2 can also market the benefits of its network and a variety of promotions to the new phone owners. These might encourage them to consider O2 as a network provider in future purchases or to continue using the phone. Within a few moments of turning on my “England phone” I was receiving promotional messages, including one that gave me 500 free minutes of calls to my local area if I was prepared to give O2 my postcode.

Carphone Warehouse stands to benefit in a couple of ways. Most importantly, it gets the retail footfall from people visiting its shops to pick up their bargain phone. In addition, it will secure a margin from its sales of top-ups for the phone.

As for Alcatel, there’s no way it’ll be making a loss on the phone. It might be making only a tiny margin, but we estimate tens of thousands of these phones were sold in just a matter of days, so it won’t be complaining. On top of which, it gets fantastic brand prominence among a target audience that may well buy one of its phones again in the future.

And for Sun readers — well, they get a bargain that underlines their loyalty to the national team. That said, I’ve little doubt that should England make its usual untimely exit from the World Cup (probably after some tortuous penalties), plenty of these seemingly disposable phones with be hurled in disgust at the TV in the pub.