Verizon (NYSE:VZ) has found a subtle way to alter one of its core rate plans which will result in customers paying more.
It's a change that new customers may not even notice that's small enough that existing subscribers may ignore it when it comes time to renew their plan. Still, it's yet another example of the old way of doing business in the mobile phone industry which category leaders Verizon and AT&T (NYSE:T) seem eager to cling to while upstarts T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) look to shake things up.
What is Verizon doing?
Verizon's Edge program allows customers to pay for a phone on an installment plan then trade it in for a new device with no penalties and without paying it off before the installment period is up. Previously the plan involved 20 monthly installment payments and customers could upgrade after 12 months. Now the Verizon website shows that Edge splits the payments over 24 months, with the no-charge upgrade not being available until 18 months. That not only means people will have to wait longer for a new phone, but they will have paid a higher percentage of their old one off before being allowed to trade it in.
Let's look at the Apple iPhone 6, which Verizon sells for $649.99 before any subsidies or deals. Under the old version of Edge a customer would agree to make 20 payments of $32.49, but could upgrade after making 12 payments totaling $389.99 Under the new plan someone would be obligated to make 24 payments of $27.08 and would not be allowed to upgrade until they have made 18 payments totaling $487.49.
That's six extra months and $97.50 in extra payments, plus, you still have to surrender a phone which is mostly paid off that Verizon can turn around and sell as refurbished. Considering that Gazelle.com will, as of 10/21, pay $225 for a "good" condition 16GB iPhone 5S, the customer would be better off making the last six payments ($162.48) and selling his or her old phone to help defray the cost of a new phone.
The math will vary from model to model, and resale rates will as well (you can likely beat the Gazelle rate selling on eBay), but the clear result is that customers joining or renewing on Edge will be signing up for a more expensive, less convenient program.
This is the trend
Verizon Edge is a non-typical plan that straddles the line between offering the benefits of a subsidized phone and offering financing. Customers pay for their phone, but they can trade it in before paying off the full value. Edge was already a step to move customers away from the model of company's subsidizing new phone purchases and the latest change moves it even closer to being a traditional financing deal.
In general the four big carriers in the United States seem to be moving away from a subsidized phone model. T-Mobile has already eliminated them completely offering customers a choice of either paying in full upfront or financing over 24 months. Sprint and AT&T both offer subsidies with a two-year contract, but both offer cheaper monthly rates to people who finance a phone or pay for it outright. The same is true for Verizon for customers choosing a two-year contract and not using Edge or paying full price upfront.
In September I wrote a piece that more fully evaluated this trend "Will Sprint, T-Mobile, AT&T, And Verizon End Subsidized Phones?" In that article, I laid out why providers would like to see subsidies go.
Verizon is being sneaky
Wireless carriers, partially due to market pressures created largely by T-Mobile, aren't able to make as much money off of hidden charges or overages as they used to. Extra data charges and people paying for using too many minutes was a gravy train that made more or less giving phones away a sound business strategy. Now customers are more savvy and have the option of leaving for T-Mobile with its clear no-overage policy, so sneaky charges need to be even sneakier.
In this case, Verizon has made a subtle shift. It may send some customers away or it may make some consider paying for their device in full. But, by choosing to simply shift language on its website making the terms worse for customers instead of being upfront about what is essentially a price increase for Edge customers, the company showed that in some parts of the smartphone market, it's essentially business as usual.
Daniel Kline has no position in any stocks mentioned. He is a Sprint customer with a subsidized iPhone. The Motley Fool recommends eBay. The Motley Fool owns shares of eBay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.