Why telcos should liberate us from lock-in plans

The telco business model relies on lock-in plans, although consumers often seem them as a raw deal. Unbundling plans could win back consumers but could put future revenue at risk.

They’ve slashed global roaming bills, reinforced customer service channels and, in some cases, have even thrown away extra data with their plans. Now some are asking what the telcos will do next in their quest to convince consumers of their good intentions.

While Telstra, Optus and Vodafone would all say that they have made progress in turning around consumer sentiment in the industry, there is undoubtedly more that can be done. It’s a wonder whether Australia’s telcos will be able to truly accomplish this goal; it seems that for every problem they thwart, another rears its head. And this latest one pits the industry’s very business model in the firing line of its consumer-focused ambitions.

Perhaps it’s time the telcos considered abolishing lock-in plans.

A new survey from Telsyte has hinted at a shift away from these plans. Consumers primarily sign up to them to gain subsidised access to the latest and greatest handsets.

But last year, in order to cut costs, the industry moved to rein in these subsidies. As a result, the iPhone 5S and 5C debuted with some of the most expensive new iPhone plans Australia’s ever seen. And given this, it’s no surprise that Telyste’s latest study revealed that last year a reduced the number of consumers said they were entering into plans to attain a new device.

The lion’s share of the 1018 consumers surveyed for the study still said they who acquired a new phone through a plan. However this majority has taken a steep fall, dropping from 57 per cent in 2012 to 43 per cent in 2013.

The data solidifies the idea that consumers are looking to these plans as a means to access new devices – not because they’re a great deal. And if the telcos can no longer afford to lower the cost of devices to incentivise these offers, then perhaps the whole proposition of a ‘lock-in’ contract needs to be reconsidered.

Lock-in style post-paid plans still dominate Australia’s telco market. This is because flexibility is considered to be a privilege rather than a necessity in the telco space.

Telstra launched its own range of contract-free plans last year. While it didn’t lock customers in to set deal for 24 months, it did come with a slew of strings attached to it.

On top of offering consumers less value for money in contrast to its regular assortment lock-in plans, the telco also asked existing subscribers to pay $50 on top of an early termination fee to jump onto the new regime.

It’s easy to see why telcos are wary about removing lock-in contracts; their entire business model is built on the guarantee of revenue they provide. To some extent, this is fair enough. To push the major telcos point of view: networks are expensive to maintain. They don’t enhance or fix themselves.

These contracts also double as a way to reduce customer churn, with contract breakage fees forcing consumers to think twice about changing provider every time a better deal comes along. Hence, when the telcos report customers’ losses, there always seems to be more of a decline in pre-paid clients than post-paid.

In a sense, the industry has already started moving away from lock-in contracts. BYO-device plans for all three major operators no longer lock consumers into a set contract or term.

Telcos can extend this strategy to plans that offer devices if they unbundled the device from the plan. In this instance, when a customer is buying a new device, the call and data plan would be an add-on rather than a compulsory part of the transaction.

This would allow consumers to switch provider at will, but they would still be forced to repay the full cost of their new device either in instalments or in an upfront full payment before they swap. Essentially, this change would only abolish the extra contract breakage fee that consumers are forced to pay when they jump operator or swap plan within their current telco.

Without lock-ins as a form of a revenue safety net, telcos would be forced more than ever before to continually justify their value to consumers, and push even further with the customer service initiatives they're already implementing to win over consumers.

It’s a wonder what the telco sector would have been like if lock-in contracts never existed in the first place. It would have made for a much more competitive sector, and may even have prevented all the hard work the operators are now having to put in to turn their brands around.