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Tuesday, October 10, 2006

Operator Branded Phones

O2 has released its’ second own brand phone, The Jet, on the back of The Ice which was released earlier in the year.

The O2 honcho responsible for devices, Gareth Hayes, hopes to eventually have 20 to 30 per cent of sales made up from own brand devices. This is quite a lot especially if the own-branded phones are used throughout the Telefonica Empire.

Vodafone is also going down the same route with its’ own brand 3G phones. Vodafone's annually purchases around 45m handsets globally which is a significant 5.5% of the overall market size of 817m in 2005. 20-30% of 45m handsets is a contract that most ODM's in the world would die for.

I expect the other big mobile operators, T-Mobile and Orange, to rapidly follow suit if either o2 or Vodafone appear to get any competitive edge either through lower handset subsidies or if either manage to design a “killer” exclusive model in the future.

Although a lot of people think that mobile operators should not enter the handset manufacturing market, I believe it is the easiest (and possibly riskiest) avenue to create differentiation in the eyes of the consumer.

The biggest problem is that the operators are actually at a cost disadvantage compared to Nokia & Motorola not only because of the economies of scale issues, but because the operators own no GSM patents and therefore will have to pay royalties to into the mysterious GSM patent pool. I have seen estimates of GSM royalties at between 8% and 28% (probably new entrants pay the higher figure) but there is no official published rate as the royalty rates are a closely guarded secret. A discussion of the economic consequence of GSM royalty rates can be found in this academic paper.

If I was in Vodafone’s position, I’d seriously be looking at the economics of buying a few slightly used patents from the now bankrupt BenQ mobile (ex-Siemens) .