As T-Mobile Moves to End Smartphone Subsidies, Verizon CEO Says "Not so Fast"
January 7, 2013 3:36 PM
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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 $399 respectively. The psychological pain of paying so much upfront for a smartphone may be worse to many consumers than the slow and steady bleed that comes from paying the costs over the course of a two-year contract.
Customers may end up winning in the long run if they purchase a device full price upfront, go with discounted service plans
decide to keep their phones for longer than the usual 2-year contract window. Those that stick to strict two-year upgrade cycles may not see much of an incentive in paying upfront.
The biggest losers, however, would likely be those that purchase a subsidized device with a two-year contract, and keep the phone well past two years while still paying the higher "subsidized contract" price for voice/data services.
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He'd be right IF
1/7/2013 6:07:38 PM
He'd be right if T-mobile was actually asking people to pay 600$ for an iPhone. That would be a really hard sell to the general population. They aren't doing that tho. Just look at the way the value plan already is setup.
For a 600$ phone you can pay 600$ up front or 200$ down and 20$ a month for 20 months. Same total cost and the extra 20$ on the monthly bill just means that the monthly cost is similar to their classic plan cost or other carriers plans. The advantage is once that 20 months is done the 20$ a month drops off and you stop paying extra for the phone. Now if you upgrade your phone right away you probably aren't going to be saving much but if your phone is good enough for what you need 20$ a month for as long as you want to hold off upgrading is nothing to sneeze at.
You also have the option of going for a cheaper phone that has less upfront and/or monthly costs which may appeal to some people too.
Sure lots of people do upgrade right way but I'm sure to some extent it is because people know they are paying extra either way so they might as well get something out of it.
RE: He'd be right IF
1/8/2013 6:37:18 AM
The interesting thing is that they seem to be keeping the Classic plans around for advertising purposes. They're simple and easy to compare to everyone else.
Once customers come to a T-Mobile store, they sweeten the deal with the Value plan, which is a little more complicated due to the math you explained in your post.
It's a good strategy, and while Verizon will always be able to charge more due to their coverage, I think AT&T and Sprint will at some point have to follow T-Mobile's lead.
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