O2 UK moves away from handset subsidies with decoupled Refresh tariffs

Much as various carriers have done in other European countries, and as T-Mobile has done in the U.S., O2 has become the first in the UK to decouple the cost of the handset from its service contracts. The operator has done so through a new option called O2 Refresh, which will launch this coming Tuesday.

It works like this: customers sign up for separate phone and airtime plans at the same time, with the duration of the plans being 24 months. If the customer wants to upgrade their phone within that period, they can simply pay off the remainder of the phone plan, with no further penalty. O2 will then unlock their phone, unless the device is exclusive to O2’s network.

Similarly, if customers hit the end of the two years and don’t want a new handset, they only have to pay the monthly airtime fee from that point on. This is a lot fairer to the user than the traditional system, where the benefit to the operator of not having to provide an expensive new device after two years isn’t necessarily passed on to the customer in full.

Bye-bye “free”

By adopting this sort of interest-free financing scheme, O2 is effectively moving away from the traditional, opaque model of subsidising the handset up-front, then burying the true cost of the device in monthly contract payments. That’s not to say customers will pay more under the Refresh scheme — it just means they will more accurately see what they’re paying for, and will no longer be under the illusion that the handset they’re buying is “free”.

In the words of an O2 spokesman today:

“This isn’t about subsidies. Our main reason for doing this is to give people more freedom to get the latest phone whenever they want without paying any extra charges — our customers are telling us they don’t want to be tied to their current phone for up to two years.

“By allowing customers to pay for their phone and tariff in this way, we are also able to more responsibly manage our costs, which will mean a better service for our customers and greater investment in future products and services.”

That is indeed a problem carriers have these days with the subsidized model: people are increasingly adopting smartphones, which are complex and therefore quite expensive. By encouraging people to upgrade more often, O2 is making it likely that customers will pay it back for their phones more quickly than previously. It is surely no coincidence that the Refresh focus is on high-end devices such as the iPhone(s aapl) 5 and Samsung Galaxy S4.

The move also handily pre-empts Ofcom’s probable introduction of new rules for carriers around price hikes and letting customers leave early. The telecoms regulator is annoyed with the operators for raising their prices, then penalizing people who subsequently want to end their contracts before the term is up.

The Refresh airtime plans start at £12 ($18.43) a month, which will get you 600 minutes of call time, unlimited texts and 750MB of data. The phone plan pricing depends on the phone, obviously, but O2 said by way of example that the HTC One would cost £49.99 up-front, then £20 a month. The carrier said customers would end up paying the same amount as they would on a combined tariff.

So how will this pan out for O2 and its customers? For that, we can turn to an admirably frank post on O2’s The Lab blog from last month, written in response to T-Mobile USA’s similar move, and bearing in mind the experience of O2 parent Telefonica in Spain, where subscriber numbers subsequently increased:

“Could it work in the UK? Would customers be willing to pay up-front for their handsets? Would customers rather take out a loan from their mobile network and pay for the handset separately? Would customers compare prices across networks and simply choose the one which is cheapest today rather than looking at the [total cost of ownership]?

“I think moving to removing subsidies is great for consumers. It lowers the price they pay and means that they’re not beholden to an evil operator gouging them for two years. And, if at any point the customer wants the latest phone – they don’t have to go through a complicated upgrade procedure – just slap down the cash.

“For the operator, I think it’s also good news. It forces them to concentrate on customer service. They don’t need to extend large loans to the customer, nor do they need to compete on up-front cost. The downside, of course, is that the monthly revenue generated by the customer could be lower.”