Smartphone subsidies 101: Why are Latin American handsets subsidised, and what challenges do operators face?

Subsidies are the bedrock of smartphone affordability. By offering cheaper handsets through a subsidy model, emerging market mobile operators provide much-needed digital inclusion among populations who may not otherwise gain internet access.

But what challenges does the subsidy model incur – and how can they be addressed?

A brief (re)introduction to smartphone subsidies

Here at Trustonic, we often gesture towards the handset subsidy model adopted by our mobile operator clients – but it can be easy to gloss over the humanitarian significance of the subsidy model, its benefits for emerging market consumers, and the challenges faced by operators who rely on subsidies for sales.

According to the Organisation for Economic Co-operation and Development (OECD), the process commonly referred to as a “handset subsidy” runs as follows: consumers sign up for a mobile communication service for a contracted period, in exchange for which they receive a handset at a reduced upfront price.

Of course, to many operators, the subsidy model is the bread and butter of their operation – and, at the risk of mixing our food metaphors, we’re not here to teach them to suck eggs. It is, however, important not only to reiterate the value that smartphone subsidies can hold for emerging regions like Latin America, but to protect that value by discussing how best to mitigate the various risks that the subsidy model entails.

These risks are especially worth addressing given that many operators are currently losing a huge amount in (apparently) uncollectable payments from consumers. As such, it’s never been more urgent to challenge the inevitability of bad debt – or to accentuate the significant benefits that digital inclusion offers to emerging regions.

Why do subsidies matter in emerging market contexts?

In many parts of the world – and especially in emerging market regions – internet access is far from a given for swathes of the population

A much-cited United Nations International Telecommunication Union report from 2021 places this figure, globally, at 37 per cent – or, to put it another way, three billion people around the world have never used the internet.

Given that 96 per cent of these digital novices are based in emerging market countries, the UN’s findings cement the presence of the digital divide: a socioeconomic gap between those who are able to use new technologies and those who aren’t.

This is a problem close to Trustonic’s heart, and one which has significant ramifications for less developed countries in terms of education, healthcare, and financial inclusion.

As the Internet Society noted in 2017, for example, internet access – and its associated “wealth of information, knowledge, and educational resources – is “fundamental” to improving educational outcomes. In turn, as the Institute of Development Studies has noted, education has a positive impact on productivity growth on both an individual level and at the national scale – helping workers and countries alike to grow, develop, and flourish.

Similar stories can be said of healthcare and banking services – and, together with education, these monumental benefits of internet access form the backdrop against which mobile subsidies are set: if the digital divide impacts the world’s poorest people, it goes without saying that discounted handsets represent the solution to one of the most urgent and far-reaching predicaments facing emerging regions like Latin America today.

That’s why it’s vital to counteract the challenging elements of the subsidy model, allowing mobile operators to continue providing affordable access to mobile handsets – a vital lifeline connecting digital services to those who need them most.

The challenge of the subsidy model

Perhaps the most pressing and obvious hurdle that subsidy-based mobile sellers need to surmount is simply that selling devices at a heavy discount doesn’t necessarily represent a financially satisfying move in the short term.

In fact, when the retail price of a given handset is significantly lower than the wholesale cost to a given mobile operator, potentially to the tune of hundreds, mobile operators will understandably feel something of a sting at the point of sale – no matter the importance of the digital inclusion project.

And, as McKinsey noted in a prescient pre-pandemic report on the subject, 5G phones are costlier to produce than their increasingly outdated counterparts – a factor that rears its head with an extra flourishing in emerging markets, many of which are ‘leapfrogging’ from 2G to 5G and skipping the preceding stages altogether.

In short: subsidies represent a serious expense in a smartphone environment which is, itself, seeing rises in wholesale costs.

Device financing: the best of both worlds

The solution to this unavoidable consequence of subsidising smartphones is simple: device financing.

By asking customers to spread the cost of their device over, for example, 24 monthly instalments, mobile operators have contrived a way for themselves and their emerging market customers alike to enjoy the best of both worlds – mobile operators recoup any losses incurred by the subsidy, while customers find new ways to afford internet-enabled devices that would otherwise remain out of reach.

Of course, this win-win scenario does involve a small but significant caveat: these spread payments are only effective for as long as customers continue to pay.

How non-payment threatens subsidisation

For many operators, this subsidy risk – in which a lack of payment results in a loss – appears difficult, if not impossible, to avoid (or even substantially mitigate).

After all, serving lower income people in emerging market territories is a double-sided coin, as their increased need for digital services is often (by definition) accompanied by a lack of reliable credit information.

Just a glance at the World Bank’s data on unbanked populations is enough to illustrate the scale of this challenge: as of 2020, the organisation reported that 45 per cent of Latin American adults don’t have a bank account – and, by extension, very little credit information.

To put it another way: the need for a credit-based financing model increases in line with credit risk. At the same time, of course, the only way to overcome this lack of history is to connect people with mobile internet devices – allowing unbanked people access to digital financial services and, among other benefits, a more complete and growing credit history.

How Trustonic can help

Trustonic’s Telecoms Platform solution allows mobile operators and other device finance providers to break this impasse by adding another layer of protection against subsidy risk.

Our device locking technology is a simple and elegant means of encouraging prompt and timely payments – allowing operators to remotely limit access to a device in the event of a late payment.

Through the use of our platform, our clients have substantially reduced their bad debt – in one instance from 35% to 11%.

Savings of this kind allow our clients to continue embracing the subsidy model and, by extension, continue to stimulate digital inclusion in regions like Latin America, allowing for unprecedented access to the financial, educational, and health services that many of the world’s lowest-income people require in order to thrive.