UK Mobile Contracts Get Longer and Longer

One of my favourite pieces of research at CCS Insight is our annual survey of how people buy #mobilephones and airtime in the UK. Last month, we published the sixth iteration of this report, and once again it threw up some fascinating findings.

Among several trends to catch my eye is that people are taking out longer contracts. Notably, nearly a quarter (24%) of those on a traditional phone-and-airtime plan told us they’re signed up for more than 24 months. This compares with just 14% in our 2019 and 2020 surveys (see chart below).

In the heyday of phone retailing, people would upgrade their phone with every new contract. Now, with longer contracts and the advent of #SIMonly deals, phone upgrades are less frequent. All four major networks now offer #SIM-only plans over 24 months.

One of the reasons for the longer terms is the ongoing squeeze on household budgets. This is prompting people to seek out deals with a lower monthly fee. As most mobile phone contracts are interest-free, the overall cost is usually the same, no matter how long the repayment terms. So I can see that a longer option would be popular to many.

The return of longer contracts in the UK was kick-started by O2 (Telefónica UK) with the launch of its Custom Plans in 2018. These tariffs allow people to pay for a mobile phone over a period of their choice, ranging from three to 36 months. EE , Vodafone and Three UK all now also offer at least some three-year plans, but not all with the same level of flexibility.

In January, O2 went a step further, with the UK’s first 48-month plans for smartphones, albeit only available on the new Samsung Galaxy S24 range and initially just until 6 March 2024. It’s a move that builds on the operator’s four-year offers for selected tablets.

Over 48 months, a customer taking the Galaxy #S24 Ultra with 30 GB of data would pay ￡55.65 per month (plus an upfront fee of ￡30). This compares with ￡64.54 a month on a three-year term and a hefty ￡83.31 per month over the traditional two years.

It’s important to be aware of two things about O2’s plans. Firstly, the device plan and the airtime plan are separate. In the above example, the latter is spread over 24 months, not 48. So, after this time, customers are free to take another airtime deal with someone else if they want.

Secondly, the Galaxy S24 Ultra is one of a wide range of mobile phones eligible for O2’s Switch Up scheme. This enables people to swap their current mobile phone for a new one every 90 days, regardless of how long they have remaining on their contract.

When I quizzed O2 on what it expects to do after 6 March, it was tight-lipped. I suspect the main reason is that it wants to gauge response. It will be mindful that although longer-term contracts can reduce churn, they also limit opportunities to engage with customers, offer new devices, and cross-sell or upsell new services.

O2 may also be mindful of provoking a reaction from Ofcom. The regulator has been keen to make it easier for people to change provider, for example through the launch of text-to-switch in 2019. It might frown on potential barriers to changing service provider.

Lastly, early March is getting close to the date on which O2 applies its annual price rises. This will see many of its customers’ bills go up by 8.8%. This is higher than other operators, most of which will implement a 7.9% increase. O2 bases its calculation on the January retail price index (RPI) rate of inflation (4.9% in January 2024) rather than the December consumer price index (CPI) figure used by rivals, which was 4% in December 2023.

Although O2 will only apply the rise to its airtime plans, being asked to pay more just a few weeks into a long-term deal isn’t a great start. So maybe the 48-month deals will re-emerge in April.

O2 wouldn’t share with me how well its new 48-month plans are going. But when I spoke to sales staff in two of its stores — one in Glasgow, the other in London — it was clear they’re proving popular. In fact, one employee told me he couldn’t recall selling a single Galaxy S24 on a plan that wasn’t for four years.

But although customers seem to like long-term deals, they spell bad news for the under-pressure mobile phone industry. They thwart upgrades and drive longer replacement cycles, which have already hit four years, according to CCS Insight’s November 2023 edition of Connected Consumer Radar.

In our survey of mobile buying habits, when we asked people how long they expect to own their current phone compared with their previous one, more than three times as many responded “longer” than those who said “shorter”. This suggests that replacement cycles will lengthen even further.

O2’s new 48-month plans won’t do anything to buck that trend.