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Verizon: Smartphone subsidies and 2-year contracts aren’t going anywhere

The rest of the U.S. mobile industry may be moving away from smartphone subsidies – or at least giving lip service to the idea – but the biggest mobile carrier of them all is standing firm behind the two-year service contract. Speaking at a Deutsche Bank financial conference, Verizon(s vz) CFO Fran Shammo reaffirmed Verizon Wireless’s commitment to the subsidy model, in which a generation of mobile subscribers have exchanged deep discounts on their smartphones for locked-down, expensive service plans.

“We believe that the subsidy model is an extremely good model,” Shammo said in comments first noted by FierceWireless. “It’s done wonders for us in this industry…To abandon that I think is a mistake.”

Many smartphones feature

Most carriers are either racing or walking away from the subsidy model, prompted by the big spike in prepaid plan adoption that started five years ago. T-Mobile(s tmus) was the first nationwide carrier to eliminate handset subsidies entirely, replacing them with device installment plans and its Jump upgrade program.

While no other Tier 1 operator has gone that far, they’ve all made major adjustments to pricing structures, charging customers who pay the full cost of their phones much less for service than contract customers. They have all also followed T-Mobile’s lead in launching upgrade programs, giving them a clear path toward new devices within their installment plans.

Verizon is among those carriers, offering its Edge upgrade plan and service discounts for customers who sign up for it. But Verizon has been much less aggressive than its peers on eliminating the ingrained service fees in its subsidy model. Unless you sign up for Edge, you’re essentially still locked into Verizon’s higher subsidy rates, which in some cases double-charge customers for devices they’ve already paid for.

According to Shammo, Verizon views Edge as just another option in its arsenal of service plans, not a service model toward which it’s trying to drive its customers. Verizon’s core service plans are still built on the old reliable subsidy and contract. In contrast, AT&T(s t) CEO and Chairman Randall Stephenson has gone on the record numerous times saying the device subsidy model is unsustainable and must end.

Verizon store

Why the difference in opinion? AT&T bore the brunt of T-Mobile’s recent Un-carrier onslaught. In the fourth quarter, Verizon’s net subscriber additions remained fairly constant while AT&T’s growth slowed. Consequently, AT&T has engaged much more directly in the pricing war that T-Mobile started.

We saw more evidence of that this weekend. AT&T on Sunday dropped the price of its 2 GB shared data tier by $15, targeting the single-smartphone plan subscribers T-Mobile has been so successful in attracting. T-Mobile countered by doubling the amount of data from 500 MB to 1 GB that customers on its baseline $50 smartphone plan receive.

The way we pay for our mobile phones and services is changing dramatically and, I believe, for the better. We’re getting more mobile data at cheaper rates, even as the speed and quality of our mobile broadband connections improves. Verizon has tried to remain aloof from that trend, and perhaps Big Red is right that it’s more insulated from the need to change than its competitors.

The contract and subsidy have been good to Verizon, helping it become the largest mobile carrier in the country and one of the most profitable in the world. There will come a day that Verizon has to abandon that model, but it looks like it will do so kicking and screaming.

Phone image courtesy of Shutterstock user Reno Martin

6 Responses to “Verizon: Smartphone subsidies and 2-year contracts aren’t going anywhere”

  1. Overall T-Mobile prepaid is the best, especially the $70 unlimited all (really unlimited 4G data) I’ve been with T-Mo for the last 3 years..HSPA+ (faux 4G) speed is outrageous ~10-15Mbps, and LTE is 15-25Mbps in NYC.

    There are probably 100 prepaid companies that sell under these networks. I’ve had good experience with Straight Talk (ATT and T-Mo). If you’re looking for an index of companies, networks, and plans, check out the master:

  2. Seems like a smart play actually. I absolutely despise contracts and really don’t favor subsidized phones anymore, (basically the car title loan of the mobile industry) but I know for certain that there are millions of people out there who are comfortable in that scenario. Just like there are still millions of people who watch CBS. Does it make much sense, not really, but it’s still a fact.

    By sticking with what they know VZ might be losing some base, but they have some to give anyway and this way they get to keep operating on their own terms and in their own comfort zone. There will probably always be a significant consumer base that is price/value agnostic, Apple proves that, so VZ probably doesn’t need to worry too much unless they have to drop their prices and move toward a volume model. As it stands now, they are so overpriced that they can lose some of their current volume and still sit atop the other three.

    I’ll likely never be a Verizon customer again, but I’m only indicative of one segment of the mobile population. There is plenty of people who don’t share my view and are willing to pay more for more coverage or even the perception of more coverarge. As Martin said, I am quite happy to be with T-Mobile, paying a third of what Verizon wanted with so far excellent coverage and excellent service.

    • Pepe67563

      You seem to imply that there really is no difference in coverage between T-Mo & the larger carriers, ATT/VZW. Sure, if you only spend time/travel through major urban areas and not most other areas, especially the western half of the United States, then T-Mo will often suffice. I have been on both sides, and it’s true. (Really, multiple sides- considering we have phones/contracts w/ 4 major carriers, and some MVNOs too).

  3. Martin K.

    Leaving Verizon was one of the smartest financial moves I’ve ever made. Despite getting a Best Buy employee discount I was still paying over $150 per month for two smartphones on a low to mid-range plan. Switching to T-Mobile and Boost Mobile prepaid plans I instantly saved $50 per month. Going even further and dropping my T-Mobile plan for Ting I’m paying about $60 a month for two smartphones. Suck it Verizon!

    I saved over $1000 per year and I can buy new phones off-contract, in one payment, and still come out ahead!