Re: I don't see it
"How does the division described tell us anything. It just shuffles the subsidy into which ever part they want to look good."
El Reg seem to have swallowed O2's line about tranparency, personally I think there a lot more than tranparency, and it's not about shuffling the subsidy round quite like you think.
The clue is in the idea of a financing agreement for the phone. If there's a financing agreement then you're into Consumer Credit Act and financial regulation, you've got crappy VAT issues that increase your corporate costs by a small amount. There's an element of CCA regulation anyway with contract sales, but why make things more complicated? But now, consider that if there's a financing agrement, you've got a nice revenue stream attached to an asset which is not being "given" to the customer anymore, but now presumably "owned" for the duration of the finance agreement by somebody other than the customer.
O2 have something of the order of ten million retail customers in the UK, so making a guess that the implied average asset value of the phones at any time is around £100 per customer, then there's an asset base of £1bn. How about you now securitise and sell the receivables stream on the phone to a bank or asset finance company? They'd be happy to put the bulk phones on their balance sheet - if a user doesn't pay then the phone has to be returned. At the moment I'd guess O2 expense the handsets, so they move through the P&L but never reach the balance sheet.
The idea of the "free" handset disappears, but I wonder if they can make it appear "interest free". OFT requirements are pretty tough, and I'd be surprised if O2 could claim that the phone is sold at the price they paid for it, so there's a markup and costs of capital (customers already pay this, they just don't see it), but this could make the financing agreement carry a hefty APR.
But what the hell? If O2 can shift a worthwhile chunk of the £1bn plus of consumer handset net asset value out of their P&L, and if some asset finance house can buy a big chunk of reasonably secure handset receivables, then everybody is happy. And the great thing for O2 is that they are selling an asset that doesn't currently appear on their balance sheet (unless they capitalise future contract receivables, which I doubt, but stand to be corrected). What does the consumer stand to lose? Not much really. Legal title to their phone for the duraction of the contract, but that's notional anyway: there's usually a clause requiring you to send it back or pay the outstanding commitment if you want early termination.