(Bloomberg) Last time Vodafone Group Plc (VOD) said no to subsidizing a new iPhone on Apple Inc. (AAPL)’s terms, consumers across Europe fled to operators that offered discounts and the handset became one of the most popular devices in history.
As Apple unveils a new version of the iPhone today, carriers want to avoid that mistake from five years ago. Vodafone and peers including Telefonica SA (TEF), having started moving away from subsidizing smartphones this year in markets such as Spain and the U.K., may be compelled back to compete on prices.
The handset will meet such pent-up demand that some carriers will be tempted to offer it at a reduced price to win market share. That threatens to force others out of their savings tactics, pushing the industry back into a margin- battering discount war. Subsidies cost European carriers 12 percent to 14 percent of their wireless revenue, according to data compiled by Bloomberg Industries.
“Subsidies are not just an old-fashioned practice, they’re also a key lever for smartphone adoption,” said Vincent Brunet, director of mobile at Orange, a unit of France Telecom SA. (FTE) “You can expect some increase in subsidies for a quarter or two.”
Bloomberg reports that since the iPhone’s introduction in 2007, European wireless carriers spent billions of euros to put more smartphones into consumers’ hands, part of a bid to get them to browse the Web, send e-mail and watch videos on their handsets.
Forgoing subsidies for the new iPhone, set to be unveiled at 10 a.m. local time at the Yerba Buena Center for the Arts Theater in downtown San Francisco, would mean missing out on most of the customers for grabs. The new iPhone may sell 10 million units this month alone, according to Gene Munster, an analyst at Piper Jaffray Cos.
One out of every five smartphones sold in Europe is an iPhone, according to JPMorgan Chase & Co. The new model will be Apple’s first change to the device’s hardware design since 2010, raising anticipation among consumers who have been holding off on buying a new handset.
In Spain, Telefonica started asking new customers to pay a full price for handsets in March. Vodafone followed suit the next month. The companies had been giving the iPhone 4S away for free to lock in customers for fixed contracts. The smartphone fetches about 600 euros ($770) in Apple’s stores when bought without a carrier contract.
In June, Madrid-based Telefonica lost more than 200,000 mobile-phone lines in Spain, while Orange won about 30,260 lines, according to data from local telecommunications regulator CMT. Telefonica has a 38 percent market share, compared with Vodafone’s 28 percent and Orange’s 21 percent.
Orange’s Brunet said the company will continue to push subsidies because that’s necessary for attracting consumers to trying out new services such as contactless payments. “When there is a big phone release, whether the iPhone or the Galaxy or another, it boosts competition,” he said.
To win back customers, Telefonica will have to soften its stance on subsidies, said Andres Bolumburu, a Banco de Sabadell analyst in Madrid. If the carrier decides not to give the new iPhone away, it will have to come up with a promotional strategy to attract consumers such as Jose Vicente Curi