ABOUT five years ago, the best freebie a consumer could get when signing up for a 24-month broadband Internet contract was a three-in-one printer.
What a long way we have come since then. In recent years, StarHub has dangled sleek notebook and desktop computers to entice customers to sign up for a 28-month broadband contract.
That is not the only deal out there. SingTel is offering free Apple iPhones with some of its mobile plans, while MobileOne is practically giving away the swish Nokia E71 smart phone at an affordable $138.
Such attractive offers have become possible because the telcos are able to leverage on their size to buy the items in bulk - and then 'give' them to consumers as inducements to commit to long-term contracts. The contracts would more than recoup the cost of the 'gifts'.
And consumers are lapping up the gifts. As a result, this type of sales gimmick - sweeteners that come tied to long contracts of up to 36 months - have become an 'industry practice', notes Singapore's telecommunications regulator, the Infocomm Development Authority (IDA).
Is this in the interest of consumers?
Well, the IDA clearly does not think so. It has issued a 10-page proposal suggesting that telcos cap contract lengths to two years and offer more short contracts without freebies.
The IDA's motivation seems noble enough. The agency says it has 'received requests from consumers' to review the current situation, which some 'feel... have hindered (them) from switching operators'.
The changes are therefore to 'promote effective competition' and give consumers 'greater choice...at competitive prices and quality'. Both consumers and the industry can give their feedback on the IDA's proposals until Jan 13.
The initiative appears to have been cooking for some months. The Straits Times understands that SingTel wanted a longer lock-in period when it launched the Apple iPhone 3G last August - a phone that it had the exclusive rights to sell in Singapore - but was dissuaded by the IDA.
If SingTel's actions are any indication, there is little doubt that the telcos will have to comply if the IDA's proposal is accepted, though it is being presented as merely a 'guideline'. And to leave no room for doubt that it means business, the IDA says it may 'subsequently impose the (guidelines) via any other regulatory framework as the IDA deems necessary or appropriate'.
That is all well and good, but the question is: Do consumers really want this?
To begin with, there are indeed shorter contracts without freebies - it is just that nobody really talks about them.
SingTel, StarHub and M1 already offer three-month prepaid mobile contracts. Broadband contracts start at six months for StarHub, M1 and PacNet, and 12 months for SingTel. But despite the existence of such offers, many consumers still opt for long contracts. They must be fairly popular or the telcos would have long abandoned them.
One can also assume that few if any consumers are fooled about the trade-offs they are bearing. The buyer would know he will pay for the freebie in one way or another. Nevertheless, most consumers seem willing to trade the freedom of switching to another telco readily for an immediate discount on hardware.
Some see this as an opportunity to upgrade from an ageing handset or to get their hands on a nifty new toy. Others resell the hardware for cash.
Entire dinner-table discussions can centre on the topic. Bargain-loving consumers frequently go online to sites like HardwareZone to dissect the telcos' latest offerings and suss out the best deals.
For the telcos, freebies are a creative way to distinguish themselves from their competitors and acquire new customers. Just as credit card companies work with restaurants or retailers, telcos ink special deals with hardware giants to get volume discounts on phones and computers and pass the savings on to consumers.
The contract length is a key leg upon which such deals stand. The operator has to make the fantastic offer worth its while too.
Remove their ability to do this, and it will probably mean that the better, more desirable freebies will go as well. The telcos will certainly not accept lower profit margins to keep dishing out these goodies to consumers.
Perhaps what the IDA is betting on is that telcos will use the money saved on buying these freebies to directly lower tariff charges. But whether this will happen is open to question.
Economic theory states that the more players there are in the market, the greater the likelihood of open price competition. In Singapore, where there are only three telcos, that likelihood may be low.
But even if tariffs do come down, consumer choice would still arguably have been curtailed. Some consumers may well be willing to bear a higher tariff over 2 or 3 years in exchange for a free computer now. Why should they be denied that choice?
To be sure, there are some problems with the current industry practice of dangling freebies. The IDA, for example, has proposed that early termination penalties be pegged to the consumer's remaining contract period. That is a fair proposal which protects the consumer.
There is also the issue of transparency. Here, the IDA can help consumers by ensuring that telcos are clear and upfront about contract lengths and termination charges when selling their products. For instance, alongside the picture and blurb of their latest $0 handset, telcos should state the contract length. In the telco advertisements that appeared in this newspaper on Dec 27, only StarHub did this.
And at phone retail shops and other point-of-sales sites like trade shows, sales representatives should, at some point before the contract is signed, ensure that the consumer knows (and signs off on) the contract length and the penalty charges.
How IDA's proposal will work out remains to be seen. But there is a place for long contracts as long as the buyer is made aware of what he is signing up for.
chuahh@sph.com.sg
This story was first published in The Straits Times on 7 Jaunuary 2009.
