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Does Verizon Already Have T-Mobile Envy?

By Evan Niu, CFA - Apr 15, 2013 at 8:30PM

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Verizon dips its big red toes into T-Mobile's strategy of offering installment plans in lieu of smartphone subsidies. Is Verizon hedging its bets?

Just weeks after No. 4 wireless carrier T-Mobile launched its "Un-carrier" initiative, ditching subsidies and contracts in favor of installment plans, is top dog Verizon (VZ 0.88%) Wireless already getting envious?

While Big Red CEO Lowell McAdam acknowledged that he'd be "open" to ditching contracts that certainly doesn't mean he wants to. McAdam was mostly saying the company could respond to changes in consumer preference if need be, but contracts and subsidies (along with device exclusivity) are just part of carriers' attempts to avoid service commoditization.

There's at least one important way that Verizon is now looking to follow in T-Mobile's footsteps: installment plans. The No. 1 domestic carrier just tightened its upgrade policies, extending the time frame for upgrade eligibility from 20 months to 24 months. At the same time, Verizon launched its new Device Installment Program, seemingly a direct response to T-Mobile's new strategy.

Starting next week, customers can purchase certain devices at full price without any contract renewals and pay them off over the course of 12 months through equal payments. There's a $2.50 per month "finance charge" until the balance is paid off, and most devices that cost over $350 are eligible. That's slightly different than T-Mobile's two-year installment plans, but still the same notion.

That way, Verizon can test the waters and see if there's interest in its 98.2 million retail subscriber base for buying devices on installment plans instead of subsidies with strings attached. When Spanish carriers ditched subsidies, the move promptly backfired. Although one key difference is that T-Mobile is offering installment plans, so consumers don't get hit with smartphone sticker shock. That eases the blow a little bit, but also has much less disruptive potential.

I also highly suspect that T-Mobile hasn't been able to completely ditch subsidies, particularly when it comes to Apple's (AAPL 0.17%) iPhone. The Un-carrier is rather excited to finally get that device in its lineup, addressing a historical weakness, but the monthly payments simply don't add up to Apple's pricing. It's inconceivable that the Mac maker would sell the iPhone for so much less to the least important carrier and directly undermine its more profitable relationships with bigger players like Verizon.

Verizon isn't ready to totally ditch subsidies and contracts, but it looks like it's willing to dip its big red toes in a little bit. 


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