Rather than going completely un-carrier like rival T-Mobile U.S., Verizon Wireless will instead continue to offer customers the option to purchase a phone with a two-year contract, meaning that a high-end flagship phone could cost around just $200-$300 after subsidies are applied. The two-year contract will mean that customers are locked in with Verizon for at least that long and in exchange, customers will pay less up front out of pocket.
On the other end T-Mobile, which pioneered the JUMP plans in the U.S. is arguing that if customers either pay for the phone up front or through more affordable monthly payments spread out over a period of about two years, the carrier will forego contracts and in exchange give you lower monthly phone bill costs for your wireless data and voice service. With JUMP, T-Mobile had completely eliminated two-year contracts in the U.S. market, and thereby also eliminating phone subsidies.
While Verizon offers something similar through the Verizon Edge program, the carrier says that there is still a huge demand for the wireless subsidy model that’s been a staple of the American wireless industry. Verizon CFO Fran Shammo announced that the carrier will offer both plans and models side-by-side in the foreseeable future, rather than eliminating the subsidy model like T-Mobile had done.
“We believe that the subsidy model is an extremely good model. It has done wonders for us in this industry,” Shammo said at a technology conference.
A big complaint with T-Mobile’s plan is that though the carrier markets the new un-carrier offering as a contract-free plan, you really are sort of tied to a contract. Though you can jump ship and leave any time and not be penalized with an early termination fee, or ETF, in the case of T-Mobile’s JUMP offering, you will still have to pay off your device in one lump sum when you leave. This means that you’ll end up having to pay for the full unsubsidized retail cost of your phone. Essentially, paying off your phone is your ETF equivalent.
For the iPhone, when you leave, you would have paid at least $650 for the base iPhone 5s model and as much as $850 for the highest configuration. Add taxes and you’re looking at around $900 or more for the 64 GB iPhone 5s that would have to pay cumulatively when you leave T-Mobile before your two years expire. On the other hand, the subsidized 16 GB iPhone model sold with a contract costs $200 up front with no monthly payments to worry about.
According to a report on CNET, Shammo’s decision to offer the subsidy model is more about managing risk than overall customers satisfaction.
“We do require very high creditworthy customers to go on to our Edge program,” Shammo noted, saying that there is a lot of risk with going un-carrier with programs like Edge.
Part of this risk is like leasing a car. If you leave your carrier before the lease is up, may not return the phone and default on your installment payments. Verizon would have to eat those costs.
However, Shammo’s logic doesn’t pan out entirely. According to the same CNET report, the CFO noted that there is also risk with dissatisfied customers leaving a carrier under the traditional model. However, those customers may also be disgruntled enough to not pay the ETF charges, leaving Verizon with the risk of not being able to collect the ETF, which could amount to as much as $350 for a smartphone.
In either case, there is risk for carriers–the ETF charge is the risk for the traditional model and the new model without contracts and subsidies carries the risks of either not being able to recover the phone from the customer in the event that the customer hasn’t fully paid off the device or not receiving the balance of the cost of the device that hasn’t been paid yet.
Regardless of the reasoning, though, customers will ultimately win where there are more models. Customers who may not be able to afford the up-front cost of paying $600-700 for the full price of the phone may also not be credit-worthy enough to qualify for financing for the phone. Those customers, under T-Mobile’s plans, may not be able to buy a phone that fits their needs.
Conversely, those same customers may still be able to afford a phone if their out of pocket payment was just $200-$300. These customers may be able to pay a little bit more every month, but are able to buy what they want or need under the old way of doing business.