Telefonica Sends Shot Over the Bow of Phone Makers

With the goal of gaining pricing leverage over phone vendors Telefonica (NYSE:TEF), the world’s third-largest wireless carrier, plans to significantly reduce the number of phone models it carries by reducing subsidies and portfolio overlaps.

The Spanish group said it will reduce handsets from 240 in its various European territories to fewer than 100, according to divisional head Matthew Key. Large European carriers have been outspoken about their desire to shift the balance of power with Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) back towards the cellcos, and to reduce their subsidy bills, which eat into profits, especially where the iPhone is concerned. Multinational cellcos have been slow to deploy this tactic. Indeed, Telefonica O2 has only 12 handsets which it sells in all its markets. However, it has been particularly active lately in forming ‘cellco buying clubs’ to procure devices collectively and further enhance bargaining power.

“The largest suppliers to Telefonica are Apple, Nokia and Samsung, and they may expect to consolidate their position while more niche vendors lose out, though Nokia’s (NYSE:NOK) conversion to WP7 will be a risk, in terms of how far the Spanish group sees demand for the newer OS. Reducing the range of handsets brings cost efficiencies and negotiating power, but it also heightens the risk of choosing the wrong models and this may play against Telefonica taking a significant chance on the largely unproven WP7, or Nokia’s (NYSE:NOK) Lumia.

“The whole concept of the phones you stock as an operator is that it’s largely consumer driven,” Kevin Yates, an analyst at RBS, told Bloomberg. “If they were to get it wrong and only stock the phones that people didn’t want, they are going to be in trouble. That’s the risk,” according to Rethink Wireless.

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