Carriers are betting that customers will stay, profits will increase

The U.S. carrier market is already slightly odd in comparison to other top smartphone markets like China or Europe.  In the U.S., carriers offer deeply subsidized prices, but inflate contract prices to compensate.  The approach stands in stark comparison with other regions where customers buy their devices at or near cost and then enjoy cheaper contracts.  The American system is a clever one, though as it offers the deceptive appearance of "cheap" bleeding edge upgrades to the consumer, leading to more frequent device purchases -- something that fuels both carrier and gadgetmaker revenue.

U.S. carriers have also figured out that they can charge small upgrade fees as another way of stoking profits, without having a psychological impact.  Following the lead of Sprint Nextel Corp. (S), AT&T, Inc. (T), and Deutsche Telekom AG (ETR:DTE) subsidiary T-Mobile USA, Verizon Wireless -- a join venture between Verizon Communications Inc. (VZ) and Vodafone Group Plc. (LON:VOD) -- announced that it would be terminating free handset upgrades, installing a $30 USD upgrade free.

As mentioned, many handsets on the U.S. market are discounted to the point that the customer pays nothing up front.  This will not change under the new system, but in effect the customer will now be paying something for any handset, as they will pay the fee, come upgrade time.

Verizon expensive
Verizon, the largest USA carrier is about to become the latest to charge an upgrade fee.
[Image Source: Flickr/Exif]

While it might seem that upgrade fees would drive customers to other carriers, since everyone is doing it, the flow of outgoing versus incoming customers is unlikely to change substantially.  And for every customer who does stay out of loyalty perks, such as convenience, work privileges, or family plans, the carrier will pocket a bit more profit. Thus at the end of the day, upgrade fees are kind of like ATM fees -- financially bad for the consumer in the most direct sense -- but a win-win situation for the fee collector.

Verizon's upgrade fee of $30 USD is roughly in line with AT&T and Sprint, who both charge $36 USD.  Sprint and AT&T held steady with a $18 USD upgrade fee for about a decade.  This status quo broke in Sept. 2011 when cash-strapped Sprint doubled its fee.  AT&T followed in suit in Feb. 2012.  T-Mobile USA -- a heavily budget-oriented carrier with cheaper plans but poorer coverage and handset selection -- has the lowest fee -- only $18.

While Verizon may be a late comer to the fee game, its arrival is significant as it is the nation's largest carrier, controlling over a third of paid mobile subscriber accounts in the U.S.

Verizon's new fee will take effect April 22.

The U.S. carrier market is currently in flux.  While Sprint and T-Mobile USA are posting heavy losses and teetering on the edge of elimination or consolidation, AT&T and Verizon Wireless are waging a war for market dominance.  Verizon and AT&T rose up from the consolidated "Baby Bells" that formed when the government chopped up the old AT&T in 1982.  The two carriers have been in a race to deploy 4G LTE networks.  Verizon is currently winning the coverage battle, but AT&T is winning the speed war.

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