Matt Aguilera

September 17, 2014 Life blog , , ,

The Reasons Why The Networks Abandoned Phones4u

A Phones 4u shop in Oxford Street, London, with its shutters down.First O2 and Three said goodbye. Phones 4U didn’t care though. They would give you £50 to upgrade your EE or Vodafone phone. Not the act of a desperate operator though. They were just giving extra value in a competitive market.

Then Vodafone decided they wouldn’t renew their contract with them two weeks ago. No big deal.

At least EE were on board.

On Sunday 14th September, it was announced that EE had declined to renew their contract and that Phones4u had called the administrators in.

The saddest part of this being that over 5,500 people are going to lose their jobs.

It had to be an easy decision in the end. EE had a choice of being the only network to provide phones for a company that was swinging on the ropes and clearly needed them.

They could say ‘yes’, making Phones4u essentially an EE shop with a different sales process and have to pay a commission per phone contract sold and a bonus for hitting sales figures.

Or they could say ‘no’ making Phones4u redundant and their potential customers more likely to come to their own stores on the high street. No commissions, no bonuses to a 3rd party.

A powerful position for EE to be in.

Some are saying the networks might have worked together to ensure that Phones4u would be no more. The timing just happens to be coincidental.

I’ve worked a lot in the telecommunications industry and take a huge interest in it to this day. It was unimaginable that this could have happened to Phones4u, especially how huge they were at the start of my career.

Though back then, it was also baffling to understand their business model whilst I was working for Vodafone.

The market over ten years ago

Around 2001, if you wanted to deal directly with networks you were not going to get the best deal.

It was bizarre.

You would see an ad in the paper from Phones4u or Dial-A-Phone offering a mobile phone for free on a cheaper line rental than the network itself could offer directly.

If you asked the network about this, they would say “that’s just the way it is”. In return, to deal directly you were expected to pay for the phone (sometimes) and then pay more line rental.

They might also tell you that if anything went wrong with your phone, the network would deal with it too.

If you had never had an issue with your phone before, you were unlikely to be moved by this. If you had, you might not want to pay a premium for it anyway.

My experience and from others I have spoken to is that the service by Phones4u was abysmal.

Having worked at a Phones4u call centre briefly. I can only confirm what I saw to be completely broken. If you weren’t buying a new contract today, you would be fobbed off and quickly too.

Phone Shop

You know you have a broken, strange culture when a sit-com can be made about your industry and be cringe-inducingly accurate.

Some people who have walked into a Phones4u store will have experienced something out of Phone Shop at some point.

The aggressive sales tactics and selfish agenda gave Phones4u the reputation of being a place to avoid. Rightly so.

The networks had now got their own slick sales processes in place and knew what tricks they were up against. The public knew it too and joined in with the in-jokes of Phone Shop. Getting locked into high-tariff contracts and being offered insurance that you can cancel in 3 months (so the salesman got their commission). It all happened.

Changing Business Model

As online shopping became increasingly mainstream and the networks own sales experience matured, Phones4u just seemed like a dinosaur. They had a complete lack of finesse when it came to handling people and listening to their needs.

What was even worse for the networks is that any issues caused at a Phones4u store affected their customers relationship with them greatly. It isn’t unheard of that promises were made at the point of sale and then the network’s own customer service had to pick up the pieces.

The strangest part is that the networks were paying for this privilege.

The press are quoted that Phones4u made £100m last year before tax. It would be reasonable to say around 80% of that would have come from phone contract sales.

So the networks were paying out a monumental amount of money to have virtually no control over the sales process for their main product. This had gone on for over 20 years.

It had helped to grow the networks though. No partnership lasts for so long without it being profitable for both sides.

Network Customer Retention Issues

Phones4u had customers coming back to their stores each year to upgrade their phone. This would be an opportunity to upgrade customers on their existing customers right?

The issue was, Phones4u got paid significantly more to connect new numbers than to upgrade existing ones. This was reflected in the prices you would have to pay.

Naturally, customers would then get a new number even on the same network to get a better deal.

It didn’t make sense to most that this was the way of the market. How could it make sense that you could essentially be a new customer on the same network and pay less?

This was Phones4u’s power. They got great commission payments from the networks to get new customers. Upgrading customers brought them in less cash, consequently the deals were much poorer.

Yet again the networks were paying for this to happen.

Something had to give. When you look back on it, it’s surprising it took this long.

First Signs of Cracks

It’s hard to say this about a business that had pre-tax profits of £100m last year but cracks did start to appear about 4 years ago. It was all to do with upgrades.

Phones4u had started to offer much better upgrade deals to customers. The days of churning customers to new numbers had to stop. Whether this was insisted on by the networks or Phones4u response to a changing market is conjecture at this point.

If the case was that Phones4u were now getting better paid for their upgrades and people were happy with their existing network, surely it made more sense to upgrade via their network provider?

Yes. This trend certainly started to gain traction. Most could see that this business model was losing in the face of wiser decisions from networks and the use of the internet to sell phone contracts.

Future of Dixons Carphone

All these issues and opinions could easily relate to the Carphone Warehouse. It’s the same kind of model, reliant on the commissions and bonuses from network providers. The loss of Phones4u is certainly their gain.

It also seems that they are supported by networks too. For now at least.

Some good news is that Carphone are set to save about 1,500 jobs through their concessions in Currys PC World stores.

Despite this, you just have to wonder how safe is the Carphone Warehouse brand when all it will take is networks to pull out like they did with Phones4u?

Summary

At the time of writing, Phones4u is not officially dead. It seems certainty that it will be.

The networks didn’t need Phones4u anymore. It had served its purpose and some of that 100m pretax profit of Phones4u will now come their way directly.

For all the negativity, you need to just look at the numbers. Phones4u has made millions of connections for all the networks, therefore making the networks an absolute fortune.

John Caudwell, the founder of Phones4u called the networks decisions ruthless and cold-hearted. It certainly is for the staff losing their jobs. On the surface, it’s just business.

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