Why Do Operators Offer SIM-Only Deals?

Over the past year, we’ve seen an explosion in SIM-only deals for contract and prepaid customers in Europe. Such deals offer just a SIM (and some minutes for contract subscribers), but come without the subsidised — or free — phone that’s attached to other plans. I’ve read that SIM-only deals now account for over 15 percent of connections in some European countries and sales are running at more than 100,000 per month in the UK.

Because operators don’t have to subsidise a new device, they’re normally prepared to offer a better deal to SIM-only customers. This means more minutes and texts for less money, as well as a shorter minimum contract term of 30 days.

In the current economic climate, SIM-only deals are proving increasingly popular with people trying to reduce how much they spend on their mobile. They can keep their current phone and pay less for more minutes and texts than they did with their previous (lengthy) contract.

While this is an obvious winner for most users, I have several reservations about the benefits of the business model for network operators. Most of the people at operators I’ve spoken with defend SIM-only as a great product, because within 12 hours they’re making a profit on it. When they give away phones to contract customers they might wait as long as 10 months to make money. This is very important to operators, as subsidy (or a lack of it) contributes significantly to their much-prized EBITDA.

But SIM-only deals are also allowing people to think again about how they buy their mobile service. Given the freedom of acquiring airtime with or without a free device, people are seeking new ways of buying a phone. As people turn to online retailers or auction sites like eBay, I’m not sure it’s such a great idea for operators.

And look at what happened to the iPhone: once Apple ran out of people in France, Germany and the UK willing to pay a premium for it, few buyers were prepared to spend almost 300 euros on a phone when every other device was free. That led to Apple rethinking its approach and allowing operators to subsidise the iPhone. The result? Huge demand that’s still growing. But this came about only after operators subsidised the iPhone and encouraged buyers to consider it alongside any other (free) smartphone.

If operators insist on pursuing the short-term gain of EBITDA at the cost of a long-term relationship with their customers, eventually they’ll erode subsidies to the point where the likes of Apple, Google and Nokia no longer need them and decide to do it themselves — and they surely will.

Nokia is proving that a direct model can work in India and Africa, and is champing at the bit to sell straight to the consumers in Western European markets so long denied to it. I think there’s a real possibility that further growth in SIM-only deals will undermine operators’ position and hand manufacturers direct access to customers on a plate.