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Verizon CEO says customers aren't ready to pay $700 for an iPhone

T-Mobile announced a surprising move back in early December to end carrier subsidies for smartphone customers. Instead of getting a discount on the phone upfront, customers would instead pay full price for the smartphone in exchange for lower pricing on voice/data plans each month.
 
However, Lowell McAdam, CEO of Verizon Communications, doesn't think that the model will work for its customer base (Verizon is the largest wireless subscriber in the United States). "It's very intriguing. Every carrier has thought about doing away with subsidies," said McAdam. But "I don't think U.S. consumers are ready to buy an iPhone for $700."


Verizon Communications CEO Lowell McAdam [Image Source: Bloomberg]
 
McAdam may indeed be right -- unlocked, contract-free 16GB, 32GB, and 64GB iPhone 5 smartphones sell for $649, $749, and $849 respectively. Those that choose the subsidized option (two-year contract) can get the phones for $199, $299, and $399 respectively. The psychological pain of paying so much upfront for a smartphone may be worse to many consumers than the slow and steady bleed that comes from paying the costs over the course of a two-year contract.
 
Customers may end up winning in the long run if they purchase a device full price upfront, go with discounted service plans AND decide to keep their phones for longer than the usual 2-year contract window. Those that stick to strict two-year upgrade cycles may not see much of an incentive in paying upfront.
 
The biggest losers, however, would likely be those that purchase a subsidized device with a two-year contract, and keep the phone well past two years while still paying the higher "subsidized contract" price for voice/data services.

Source: Reuters



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what subsidy
By menting on 1/7/2013 3:59:09 PM , Rating: 5
What subsidy?
They don't subsidize 1 cent.
You're paying for the phone yourself regardless. All they're doing is giving you a loan that you're paying back every month. And when you have fully paid for the phone, if you don't get a new one at the end of the 2 year period, you're basically giving them free money.




RE: what subsidy
By Rukkian on 1/7/2013 4:28:18 PM , Rating: 3
Verizon actually gets the phone paid off in less than a year, hence the fact they will pretty much subsidize a new phone for virtually anybody after 1 year if you break it. After that, you are getting screwed by their rates.

I really like what T-Mobile is doing, just wish their coverage were better. Would love to have the option to either deal with my phone, or take a small loan (which they actually do), or pay full price, and then getting significant discount on the plan itself.

My step mom has had her phone (now on our plan) for 7 years, and my mom (also on our family plan) has had hers for 4.5 years. Both of these would be much better off with a lower rate, but of course Verizon would never want that.


RE: what subsidy
By Mint on 1/7/2013 9:04:36 PM , Rating: 3
Which suggests that it actually is a subsidy, because anyone who doesn't replace/upgrade their phone every year or two is subsidizing those that do.

I also like what T-Mobile is doing. I'm on their Monthly4G plan, because I do as much calling on VOIP as I can and can live with the $30/month 100min/5GB plan. I know Verizon has better coverage and 4G speeds, but I'd have to pay ~over $800 more per year for that and I can't justify it.


RE: what subsidy
By Chadder007 on 1/7/2013 4:29:42 PM , Rating: 3
Exactly, free money for them once the contract is expired.


RE: what subsidy
By neihrick1 on 1/7/2013 5:59:21 PM , Rating: 2
and if you do want to upgrade, now there is a $30 "upgrade fee".


RE: what subsidy
By Brandon Hill (blog) on 1/7/2013 6:08:01 PM , Rating: 2
AT&T tried to pull that crap on me when I upgraded my line and my wife's line over the summer. I called them up and they promptly credited my account $60.


RE: what subsidy
By BillyBatson on 1/7/2013 7:20:01 PM , Rating: 2
My friends and I did the same as soon as our bills came in after we upgraded to the iphone5 we called and asked to have the upgrade fee removed and were told it couldn't be removed but our accounts were credited the same amount. No excuse needed just 30 minutes of patience on the phone with at&t customer support....


RE: what subsidy
By CZroe on 1/7/2013 5:12:15 PM , Rating: 2
You obviously don't know what a "subsidy" is. Hint: Loans are "subsidized." The cost is in the monthly contract. They aren't mutually exclusive.

The manufacture gets the full price of the phone from the carrier just like a car dealer gets the full amount from the lender with a lien on a car. It was subsidized by the carrier with the contract and enforced with a hardware lock. A car loan contract is similarly enforced with a lien on the title.


RE: what subsidy
By menting on 1/7/2013 6:06:41 PM , Rating: 2
http://dictionary.reference.com/browse/subsidy
http://banking.about.com/b/2006/12/03/whats-a-subs...

A loan is only a subsidized loan IF you end up paying less than what it would cost with interest, which you cannot tell in this case because they hide it in the bill. And from T-mobile's bring your own device plans vs plans with "subsidized" phones, it's a $20 per month for smartphones. That means even over a 22 month period, it's a $440 difference, BEFORE the crazy tax you get charged for wireless plans. I'd say that's a pretty sure sign wireless companies don't subsidize anything for you, making the loan un-subsidized.


RE: what subsidy
By Mint on 1/7/2013 9:15:58 PM , Rating: 2
Except you forgot that after two years, my rate doesn't go down if I want to keep using the same phone; meanwhile, those that do choose to upgrade at that point pay $400+ less than retail to do so. That means I am subsidizing their purchase.


RE: what subsidy
By menting on 1/8/2013 8:32:41 AM , Rating: 2
oh you definitely are
I guess you're right then. It's a subsidized phone. But it's the consumer that's subsidizing the wireless company :)


RE: what subsidy
By CZroe on 1/8/2013 11:28:44 PM , Rating: 2
I didn't say who it was subsidized to. The device maker got the subsidy in exchange for your contract and the device maker locking it to their network.


RE: what subsidy
By kleinma on 1/7/2013 5:18:03 PM , Rating: 3
What exactly is the loan?

If you buy a phone at full price for say $800 and you want to use it on Verizon service, you pay $30 for data, plus whatever talk/text amount you require.

If you buy a phone at subsidized price for $200 with a contract, you pay $30 for data, plus whatever talk/text amount you require.

The early termination fee you pay for breaking your contract is to recoup the phone subsidy.

I fail to see how this is a loan when you are paying Verizon the same price for their service. If they had cheaper plans for non contract smart phones, then fine, but they don't.


RE: what subsidy
By menting on 1/7/2013 6:08:02 PM , Rating: 2
verizon not offering the option to give you a different price even if you bring your own phone. doesn't mean it's not a loan. It just means whether you want to get raped more or less.


RE: what subsidy
By Dr. Kenneth Noisewater on 1/8/2013 11:39:29 AM , Rating: 2
In the real world, the subsidized phone is not going to have the same low-cost plans as the unsubsidized phones. So the unsubsidized paygo plans can be say $20-30/mo for just the alacarte stuff you need, while the subsidized monthly plans start at $50 for non-unlimited and go up to $100 for unlimited, with required data plans as well. So if you're paying $30-70/mo more for services that you don't want or need (or can get on a paygo plan for less) then over 2 years you're overpaying $720-$1680 for that subsidy.

Another thing factoring into Verizon comments is that CDMA carriers don't use SIM cards (though perhaps with LTE this will change?) so switching phones is not as simple as just dropping your SIM into a new one.


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