Last Thursday, Verizon (NYSE:VZ) pushed back against other wireless providers in what's quickly becoming a price war. The company responded to AT&T's October price drop and Sprint's "Cut your bill in half" promotion with a price cut of its own. Starting that day, future Verizon subscribers can expect as much as $10 off their monthly bill for the provider's More Everything shared data plans.
The move lowers Verizon's 6GB unlimited text and talk plan to $70 per month before account access fees. And that's important because AT&T's earlier price cut dropped its 6GB competing plan to that level. On its website, the company builds upon this price cut by proudly proclaiming its lowest pricing ever -- two smartphones, unlimited talk and text, and 6GB of shared data per month for $100.
Account access fees are the key here
The only catch -- or rather the biggest one -- is subscribers must use its Verizon Edge plan to receive this pricing. For those not familiar with the plan, the full retail price of the device is broken down into 24 monthly payments and charged alongside the $100 service cost. In return, Verizon discounts the line access fee by $25 per month -- from $40 to $15. You read that right... you are paying the full retail price for the device.
And that's important. In the past, wireless providers would gladly pay a device subsidy to get you to sign a two-year contract. Even now, that subsidy is generally around $450 -- Apple's iPhone 6 16GB device retails for $649 but available on contract from Verizon for $199. More recently, however, wireless providers have tried to wean customers off of these margin-squeezing subsidies by decoupling the costs of the phone from the service. However, it appears most providers -- T-Mobile excluded -- still want subscribers to sign two-year contracts.
Well, is the deal cheaper?
Still, for subscribers, the question is whether this deal would be better than buying the phone outright and paying the higher cost. And to answer that question, a breakeven analysis is required. For an accurate comparison, I ran the numbers with Verizon's Edge Plan for two lines (both using Apple's iPhone 6 16GB phone) and if you'd just buy the phone outright.
|Plan||Initial Cost||Monthly Cost-Service||Monthly Cost-Phones|
So a breakeven is rather simple here. The initial cost of $479.98 isn't recouped by its cheaper monthly price until 33.9 months. Obviously the better deal under this scenario is the Verizon Edge plan, mostly because the line access fee cut of $25 per line equals $1,200 over the life of a two-year contract.
It appears we've crossed the Rubicon as far as device subsidies go; this may be the first time a non-subsidized plan may be a better deal. But I'm still not sold on the deal to consumers long-term. The only reason this appears to be a better deal is the line access fee cut and there's no guarantee Verizon will extend that once this contract ends.
For would be shoppers, it is good to see Verizon cutting their cost of service for both conventional customers and Edge shoppers -- for shareholders, the opposite is true -- but shareholders can take heart in the fact the company is looking to wean customers off of device subsidies. Service price cuts are temporary, eventually changing to an more-lucrative business model takes a little longer.
Editor's note: A previous version of this article incorrectly stated that the "cut your bill in half" promotion was being offered by T-Mobile.
Jamal Carnette owns shares of Apple, AT&T, and Verizon Communications. Not only that, he loves the device subsidy and will fight for it -- in the words of Charlton Heston -- until they pry it from "my cold, dead hands." The Motley Fool recommends Apple and Verizon Communications. The Motley Fool owns shares of Apple. 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.