America’s largest wireless carrier, Verizon Wireless, announced that they would no longer be selling two year phone contracts as of August 13th, 2015. Verizon’s new plans involve no activation fees, are month-to-month, and require that customers purchase their own phones at a retail rates. Verizon will either sell phones to consumers for their full retail prices (for premium phones, this is probably between $600-$800 per phone) or, through VerizonEdge, consumers can make monthly payments with interest for two years to Verizon for their phones. Gone are the days where Verizon would subsidize a new phone purchase every two years, selling the consumer a phone for $200 that would retail at three to four times that price. Given that there is no such thing as a free lunch, Verizon customers would pay Verizon back for subsidizing the phone over the course of the cell phone contract. The new monthly Verizon prices are about $15-$25 cheaper per month than the previous contract prices as Verizon passes some of its savings on phone subsidies back to the consumer.
Verizon now joins T-mobile in no longer offering 2 year contracts and there is considerable speculation that AT&T will adopt a similar contract-less pricing model. Very soon, we shall likely live in a world without the two year cell phone contract and without the carrier subsidy for new phone purchases. Rather than switching out a phone every two years like clockwork, savings savvy consumers will attempt to extend the life of their cell phones in order to save money. It’s a brave new world, and one that may produce a whole new set of winners and losers in the cell phone arena.
Short Term Winner – The Carriers
Reducing customer acquisition costs will immediately impact the bottom line for the carriers. Increased competition has left the carriers hurting as data prices drop and a customer acquisition war has led to the carriers paying each other’s termination fees in order to woo customers into lower priced contracts. Ending the contract expectation will stop the customer acquisition costs from spiraling upwards.
Short Term Losers – The Consumer
Premium cell phones currently on the market and in the pocket of most consumers have a very clear planned obsolescence date. The trend of sleeker, thinner devices has moved the Achilles’ heel of cell phones, the cell phone battery, into an integrated and irremovable internal battery. Almost all premium smart phones meet battery expiration after 300-500 charges. People near the end of their contracts will face sticker shock on phone prices when their contracts expire and won’t have many options to buy premium cell phones with lifespans longer than the two year battery expiration point.
Long Term Winner – The Consumer
Although Consumers will face some upfront costs, the long term savings from moving to contract free phone service will ultimately lead to a reduced price for consumers. Having a majority of consumers in a contract free pricing plan will lead to increased, daily competition between cell phone carriers based on two factors: the quality of their network and the price of their service. Also, consumer demand will change the face of the premium phone market, either lowering the price of premium phones or causing cell phone manufacturers to build more durable phones that have longer life-cycles.
Long Term Loser – Premium Cell Phone Manufacturers
Cell Phones are significantly cheaper in European and Asian markets where phone purchases were never subsidized by carriers. The big premium manufacturers have enjoyed the advantage of a special relationship with carriers in the US, where the carrier subsidizes the price of the premium cell phone into the customer’s monthly bill, thus allowing premium manufactures to have consumer facing contract prices well below the retail price of discount phone sellers. Their products have become increasing disposable with no focus on product durability.
Now that the Premium Phone Manufactures will lose their subsidized consumer pricing, their high retail prices will drive some consumers to try out discounted cell phone brands. Consumers paying a premium will seek phones with durability. Expandable storage capacity and removable batteries – things that have been phased out of almost every premium phone – will come into demand. Ultimately, cell phone purchases will now be more determined by quality and price. Convincing consumers to upgrade to a premium brand will require true innovation and quality in order to win the consumer over. Ultimately, either a decreased price or increased quality of cell phones will be a win for consumers out of the profit margins on the premium cell phone manufacturers.