It will be an easy feat to follow T-Mobile and eliminate contract and subsidies – it’s just a question of whether consumers want them eliminated, Verizon(s vz) CEO Lowell McAdam told CNET on Thursday.
Speaking to reporters at a Verizon event in New York City, McAdam said the carrier would watch T-Mobile’s new no-contract strategy closely to see how consumers respond. “I’m happy when I see something different tried,” CNET quoted McAdam as saying. “We can react quickly to consumers’ shifting needs.”
To be honest, you wouldn’t expect McAdam to say anything different. In the past, carriers have expressed dissatisfaction with the subsidy model that dominates the U.S. mobile industry. That model dictates they sell increasingly expensive smartphones at cut-rate prices and thus take a big financial hit when they first sign up a new customer. Eventually they recoup those costs over the course of a two-year contract through higher service fees.
Most carriers have already eliminated subsidies entirely for tablets, and as McAdam points out, they would more than willing to do so for phones, if customers are amendable. That said, Verizon has done quite well for itself with the current system — it has no reason to gunk up the works unless there is some massive shift in consumer sentiment.
There’s a reason why T-Mobile was the carrier to challenge the long-established contract-and-subsidy model: it had nothing to lose. It is the smallest — by a big margin — of the four national operators, and for the last several years it has barely grown. You can call its Un-carrier strategy an act of genius or you can call it an act of desperation, but T-Mobile had to do something and had to do that something quick. McAdam only has to sit back and wait to see if it works. And he’ll likely have to wait a while since many of the customers who might be interested in what T-Mo is selling are still locked into contracts.
So what if T-Mo’s new contract-free plans prove wildly successful? Would other carriers give up on contracts completely? I seriously doubt it. Verizon, AT&T(s t) and Sprint(s s) may have their issues with the subsidy model, but they also love to the stability of long-term contracts. The last thing they want is a constantly shifting customer base, in which huge numbers of subscribers turn over each quarter. Even if the carriers didn’t have to absorb device subsidies, there are still substantial costs associated with acquiring new customers. They would much rather just lock down the ones they have.
All three carriers offer prepaid services for customers who demand or don’t qualify for postpaid services, and most carriers will sell you a postpaid plan without a contract if you pay for your device upfront. In fact, they benefit considerably if you do so because they’ll charge you the same monthly rates they do for subsidized customers – they get their cake and eat it too.
That’s where I think the other carriers will have the biggest difficulty adjusting to contract-free models. To make that model the work they’ll have to charge lower voice, SMS and data rates to those customers who eschew subsidies. If carriers are no longer recouping the cost of the device, they can’t justify the rates they charge today. Lowering rates is not something they want to do.