Apple introduced the iPhone Upgrade Program at its September keynote. Image source: Apple.
It didn't take long after Apple (AAPL +1.18%) announced its iPhone Upgrade Program for Sprint (S +0.00%) and T-Mobile (TMUS 0.57%) to come up with special offers of their own. Verizon (VZ +0.08%), meanwhile, seemed resolute about maintaining its current pricing and upgrade policies.
Verizon's policies don't allow its customers who bought a phone with an installment plan to upgrade to a new phone until their existing phone is 75% paid off. For someone making regular payments, that would take 18 months.
But right before the iPhone 6s hit the shelves, Verizon budged on its upgrade policy. It will allow iPhone 6s customers to upgrade their phones after 12 months.
What made Verizon change?
Apple's new iPhone Upgrade Program is a threat to all wireless carriers. Apple is selling unlocked iPhones for the same price as the carriers sell iPhones locked to their networks. Additionally, Apple's plan lets customers upgrade their iPhone every 12 months to get the most recent model. That kind of flexibility is nice to have, especially if you're paying the same price as you would with the carrier.
It also means that customers will have more opportunities to switch carriers. With a carrier-sponsored financing plan, the customer can buy any phone, but it's locked to that carrier. Apple flipped the script with the iPhone Upgrade Program, locking customers into the iPhone, but letting them choose any service provider.
This represents a threat to Verizon, which has some of the highest pricing in the industry. Meanwhile, T-Mobile and Sprint have been touting leasing plans for the new iPhone, which cut the cost down to as little as $1 per month if you trade in an old phone. T-Mobile has even structured a promotional lease that will allow customers to pay $125 less than retail for the new iPhone 6s.
With the incredible low-priced offers from low-end competition, and the additional flexibility provided by Apple's plan, Verizon was facing potential customer losses. What's more, iPhone customers are historically valuable customers.
How will this impact Verizon?
Verizon's biggest draw is still its network, which is arguably the best in the country. However, both Sprint and T-Mobile continue to make improvements that are closing the gap between the best and worst networks. A customer who's free to try other networks is much more likely to defect than one who must end a phone contract to switch providers. As a result, Verizon stands to maintain a lower churn rate compared to its previous non-competitive offer.
But Verizon will still have to finance those new iPhones. The company packages up its receivables into securities, and sells them to banks. With the upgrade terms reduced to 12 months from 18 months, those securities carry a bit more risk that the full value won't be recouped, which means Verizon could see a drop in the price it receives per contract on those securitized loans. That would have a negative impact on the company's cash flow, but the discount is likely only a few basis points. Verizon could possibly make up the difference in volume.
On the flip side, Verizon would benefit from customers who choose to finance their phones through Apple, but still decide to stick with the wireless carrier. That way, it can offload that financial risk to Apple, but the risk is likely more than offset by lower switching costs for customers.
Although Verizon isn't offering the same value as T-Mobile and Sprint when it comes to purchasing or leasing an iPhone 6s, it's offering similar value to Apple. That's the real key, as Verizon believes its superior network will take care of the rest.
Sprint and T-Mobile can compete for the value hunters, but Verizon is aiming to maintain its share of premium customers. The new upgrade terms should certainly help.
