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iPad 3: the tablet that will give mobile operators a headache

Maria S. Wise | 96 | |

Whatever the commandments were written into Apple’s latest tablet, “thou shalt have the option to purchase a subsidized iPad 3 from your mobile network,” is unlikely to be among them. The first iPad appeared in February 2010, and dozens of Android-based tablets have launched since, but UK network operators have not embraced them as they have the smartphone. Why have O2 and Vodafone shown so little interest in promoting devices designed to run on their networks, which could theoretically lure customers into spending hundreds of pounds more each year on data plans?

The simplest answer is that while phones have made Apple rich, they have begun eating into mobile networks’ fat profit margins. Tablets only reinforce that pattern. As one network executive put it, with the iPad, “all you are doing is subsidizing Apple.” The iPad has found 55 million buyers worldwide without help from the networks so far. The market has been created without their use. Phone calls and texts are good money earners because they run on the old 2G networks, long since built and paid for. But smartphone customers are swapping calls and texts for internet services. These run on 3G networks, which require a big investment each year to accommodate the explosion in traffic – up 250% over the last two years.

And the speeds offered are still much slower than home broadband. Until networks spend billions more upgrading to 4G, using a tablet for watching films or playing video games, and all the other data-hungry media it was designed for, will be a more enjoyable experience on Wi-Fi until high-speed mobile broadband is up and running some time at the end of 2013. Tablet customers do not need at all for calls and texts. So there is limited profit to be shared with the customer in lowering the device’s price.

O2 does not subsidize tablets. Vodafone stocks two brands, Apple and Samsung. Its iPad 2 costs £229 upfront plus a two-year contract at £27 a month. The Vodafone price adds up to £877 over two years for 2GB of monthly data. At that price, it’s obvious there is no subsidy in Vodafone’s offer. Buying directly from the Apple store is cheaper. The basic 3G tablet is £499, while 2GB of data will set you back £15 per month at O2, adding up to £859 over two years.

Three’s deal is the only true subsidy, from £229 upfront to £15 a month and a 15GB data allowance. That adds up to a cheaper than the rest, £589. But Three admits that most iPad customers bring their kit to the network. Apple does not cut networks any special slack on wholesale prices. The networks make money selling the data plans, not the hardware. There is also customer reluctance. Technology changes so quickly people are reluctant to sign two separate 24-month contracts, one for the tablet and another for their normal phone. They want a single data subscription shared between all devices – from the laptop dongle to the phone.

iPad 3

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So far, of the big players, only Orange has stepped into this new tariff zone. It will sell both iPad and iPhone devices for an initial £99 plus £65 a month for two years for 2GB of data, 600 minutes, and unlimited texts. That amounts to a racy £1,659 over the two years. But its multi-device offer is limited to a small range of products, including Apple’s.

The word on the street is that multi-device plans are coming from other operators this year, but tablets will likely remain peripheral until they do. Given the expense of the 3G data plans, most consumers will find it easier to connect to the internet on their tablets via Wi-Fi. The danger is that as urban availability of free or cheap Wi-Fi spreads, a new generation of customers could grow up with a new generation of devices that don’t rely on mobile phone masts to stay connected. The network operators could themselves become peripheral.

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