Why won't people pay for phones? According to the UK mobile industry, the answer is simple: years of price competition have made retailers slice their margins to offer handsets cheaper than the guy next door.

The operators want revenue from voice, text and data sales, and a free phone becomes an effective way of luring customers into expensive contracts. UK consumers are so hooked on free phones that a salesman at The Carphone Warehouse said: 'No-one would pay £35 per month for 18 months if they didn't get a top handset for free.'

However, they would, but just not in the UK. The British mobile phone market is one of the most highly subsidised in the world. In many countries, people happily sign up to 12 or 18-month contracts without getting a free phone. Consumers pay through the nose for top-spec handsets, often shelling out hundreds of pounds on top of their contracts.

Go to Sweden and see for yourself. The average contract costs between £5 and £10 per month, with no inclusive minutes or texts, no cashback and no handset subsidy.

Even so, Sweden boasts one of the most highly developed mobile markets in the world. ARPU is generally high, mobile penetration is at or around 100%, 3G services are well developed and mobile broadband, using either Wi-Fi or HSDPA, is popular. Recent figures from PTS (the Swedish ministry of post and telecommunications) show that nearly half the population would be happy to cancel their landline contracts and use mobile phones instead. One in ten have already done so. In other words, high handset prices have not deterred Swedish consumers from buying and using mobile phones en masse.

'Knock-out': a clean break
Swedish consumers had become accustomed to free phones, as consumers have in Britain. Three years ago, the Swedish market made a clean break with handset subsidy when local operator Tele2/Comviq introduced its 'Knock-out' range of tariffs. Instead of using free phones, bundled minutes and texts to lure customers into expensive contracts, the operator lowered the fixed fees, charging users just for the calls they made.

Like most contracts in Sweden today, 'Knock-out' voice and text rates are low at around 6p per minute, but because there are no inclusive minutes, the total spend quickly adds up to a lot more than what UK customers pay for equivalent usage.

'That model quickly became the dominant one for contract sales,' recalls Jens Pettersson, mobile manager for Tele2/Comviq. 'Parallel to that, the market moved towards people paying for their handsets in instalments. You still pay the full cost of the phone, but in the form of a higher monthly fee.'

This means some operators and retailers, most prominently The Carphone Warehouse (known in Sweden as The Phone House), can still offer phones for as little as 1 SEK (7p) at the point of purchase. However, the deal is pay-by-instalments, rather than true subsidy. The Swedish hire purchase scheme may sound like subsidy, but there is a clear difference. The customer knows the phone is not free and that it is being paid for; something that can't be said for UK subsidy.

Around £20 for an N73 is added to the bill every month for at least 12 months, and as there are no inclusive minutes or texts, this usually adds up to the initial price of the phone had it been bought at the outset.

Sweden's contract sales did not grind to a halt as a result of this new pricing model. Instead, customers reacted positively and appreciated the lower monthly fees and added control over their spend. While high-end handset sales may have dropped in favour of cheaper models, the people who really wanted the latest handsets kept buying them. And since budget users hadn't used expensive data services even when handed top-spec phones for free, operators could continue to draw data revenue from high-end users, without providing free phones.

Crucially, retailers accepted and quickly adopted the change. Daniel Lindholm, deputy MD for The Phone House in Sweden, says smaller fees and upfront charges make deals easier to understand, which is something he believes Swedish customers value highly. 'English deals are more like all-in-one solutions, which is what 3 is also trying to do in Sweden,' he says. 'I would say that is not as clear and simple. It makes it difficult for the customer. ”What am I getting? How much does it cost me?” It is a much more advanced calculation for them to make.'

Independent retailers are not as aggressive in Sweden as they are in the UK. While The Phone House is a significant player with a large store portfolio, it does not discount phones or contracts nearly as much as its parent company does in the UK.

A large proportion of mobile sales are done either direct or through one of the big electronics retailers, similar to Currys in the UK. These retailers sell everything from white goods to video games and are more geared towards off-the-shelf sales (such as Sim-free handsets) than complicated contract sales. In contrast, a large proportion of mobile contracts sold direct by the operators are Sim-only.