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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RE: what subsidy
Dr. Kenneth Noisewater
Dr. Kenneth Noisewater
1/8/2013 11:39:29 AM
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.
"Paying an extra $500 for a computer in this environment -- same piece of hardware -- paying $500 more to get a logo on it? I think that's a more challenging proposition for the average person than it used to be." -- Steve Ballmer
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