The collapse of Phones4u gives us a look inside the mobile phone market – and it isn’t pretty

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September 26, 2014 by Paul Goldsmith

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The collapse of Phones4u looks, at first, like something that isn’t in consumers’ interest. Given what they were doing, which was allowing a consumer to compare mobile phone providers and phones in order to get the best one of both for their needs, you could argue that this is a reduction of competition. Certainly the fact that their shops have been bought up by mobile phone operators such as Vodafone and EE suggests that we are going to have to go to a situation where you have to trawl round different shops in order to compare phones instead of having a one stop shop in which you could do that. Yet once a little bit of research is done, it becomes clearer that Phones4u were victims of their own hubris, and that the decision by mobile phone operators to go it alone and cut out this particular middle-man is a sign of a sensible strategy in a shrinking and saturated market.

When Phones4u signs up a customer, the mobile phone networks have to pay them between £100 and £150. This is money that a group of companies that are having to fight for every customer, and every penny of revenue and profit, cannot afford to treat lightly. Worse, Phones4u demanded that this commission was paid to them upfront, instead of over the life of the, normally 24 month contract. Even though there were normally ‘clawback’ clauses if customers abandoned the contract, these deals are not good for a company’s cashflow.

The mobile phone market has changed. By the end of next year, smartphone ownership will reach 90% of the population. But, sales are predicted to fall by 11%, because people are hanging onto their phones for longer. Average revenue per use has fallen over the last two years by one pound a month and the number of mobile phones (including business ones) in circulation is falling, leading a cut of £75million in sales for the mobile phone companies when they are needing to invest in 4G and cope with new rules on roaming charges. This explains their wish to take control of every penny of revenue they can get.

It also explains why Carphone Warehouse (CW – and now called Dixons Carphone after a merger) won’t be wringing their hands with glee either about the loss of their biggest competitor in the mobile phone aggregator market. With mobile phone operators wanting to expand their own store network and push online sales, CW will look to continue to expand their sales of tablets, consoles and other accessories, so that they aren’t reliant on the mobile phone networks. They apparently haven’t concluded a renewal of EE’s contract with them, and the collapse of those negotiations was what led to Phones4u’s collapse. So no chickens can be counted.

So going back to the question at the start, is this all good for customers? Well, if costs can be cut from cutting out the middleman, then yes, in theory it will be good for customers. But if it turned out that it was the middleman that was keeping competition going, then we all lose out. It will be interesting to see.

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