Mobile operators pull pre-pay phone subsidies

Pay-as-you-go mobile phone users are set to be hit in the wallet as the UK's largest operators pull their subsidies on handsets in response to a regulatory change that came into force last month.

Vodafone has become the latest operator to cut its discounts for sales of pre-pay phones, saying all subsidies would eventually be removed. This followed similar moves by O2 and Everything Everywhere, the Orange and T-Mobile owner.

This is in response to Ofcom's decision to cap termination rates, the cost charged by networks for customers on rival networks, and landlines, connecting to theirs. The regulator said in March, that these mobile termination rates must be reduced by 80 per cent in four years, potentially costing the industry £2bn. The operators warned at the time that pre-pay customers could suffer as a result.

A spokesman for Vodafone told The Independent: "Faced with the damage caused by the recent decision on mobile termination rates, we've been reviewing our subsidies on pay as you go handsets," adding: "We have no choice but to remove them from pay as you go mobile phones from July onwards."

The move to slash subsidies "is very much an indication of the way the industry is going", one source at a rival operator said. "Ofcom's decision makes some of these customers loss-making,"

Carolina Milanesi, analyst at Gartner, said. "The subsidy is one of the biggest costs for the operator. If their costs are growing elsewhere in the business, something has to give. Subsidies on pre-pay also tend to have a lower rate of return for them , making it an obvious target to be cut back."

Today's news will be disappointing for the regulator, which enforced the change to termination rates in a bid to cut costs for consumers.

A spokeswoman for Ofcom stressed that there were many factors that go into an operator's pricing decision, and added: "We expect the price of calling a mobile from a landline to fall and there to be an increased range of mobile price packages as a result of the reduction in termination rates."

Ofcom announced the cuts to mobile termination rates would see the cost of one network connecting to another drop from 4p per minute to 0.69p by 2015.

Ronan Dunne, the head of O2 in the UK, said at the time of the company's results that the group had begun to remove subsidies for its pre-pay handsets, adding they had become "untenable". Mr Dunne said O2 and the other major operators had been forced to rebalance its books with increased charges elsewhere, adding that some pre-pay customers will be loss-making for the company. Insiders at Everything Everywhere revealed the company was in the process of removing the subsidies for pre-pay handsets starting from the end of June.

The other UK operator, 3, provides little or no subsidies for pre-pay handsets. A spokesman said: "Subsidies offered by operators for pre-pay handsets are cyclical. If those subsidies are too great, what they often find is these phones get bought up and exported out of the country."

The practice of so-called "box breaking" has become a huge problem for operators in the pre-pay market. The higher the subsidy, the more likely it is the phones will be bought up and sent abroad to markets where there is huge demand, and where they will not see any benefit.

The subsidy cut will also dent smartphone sales, which have been increasingly found on pre-pay contracts, with iPhones and BlackBerrys popular. Ms Milanesi said: "The biggest hit will be for the hardware vendors. Customers will have no incentive to upgrade."

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