The Basics: Understanding Verizon's Subsidy Discount And It's Cost To You

This is a follow up to our article titled “The Basics: Understanding Verizon’s Upgrade Policy.”

We get a lot of searches and questions from people trying to understand Verizon Wireless’ upgrade policies and discounts.  Our Upgrade Policy article accounts for a lot of our traffic, but upon further review, we felt it might be prudent to follow up with an article explaining why discounting has changed over the years, and what it looks like today.

If you haven’t read the original upgrade article, please read it first.

And now… the fascinating world of Verizon Wireless subsidy.

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Verizon Subsidy, circa 2005

Verizon Wireless had a consistent discount subsidy in 2006 and earlier.  Whatever they paid for a phone would be rounded up to a nice “.99″ type of price, and called Full Retail.  In most cases, the rounding up process might have tacked on about $10, but usually no more than about $20.  Full Retail isn’t about making a profit, it’s about covering cost.

Once Full Retail was decided, the two year subsidy price would be $120 off.  The one year pricing would be $70 off.  So a $139.99 Kyocera KX414 of that era would run $19.99 on a two-year contract.  That also means that a $619.99 PDA phone would run $499.99 on a two-year discount.  For those who don’t remember buying phones around 2005, most phones were $100 to $150.  You had a few higher-end (mostly due to Bluetooth capability) handsets that could run as much as $250 after rebate.  And PDA phones - what we refer to as smartphones in 2011 - were easily $500 or more, with the “cheapest” of them (usually a Palm Treo or a Samsung i500) at about $400.  Really basic phones, such as the Samsung a650, might have gone for $70 or lower for a time, but eventually ended up as a $20 phone (not the best of categories).

Everything has changed.

Verizon Subsidy, circa 2011

Today, the technology has changed drastically.  Bluetooth, which was once a feature on ultra-high end devices, is now on the most basic phones.  PDA phones - smartphones - have become thinner and much more functional.  2005’s better phones are now 2011’s basic phones.

As the increase in functionality came, so did the demand for lower prices.  At the same time, the cost of mobile phones really hasn’t changed much (part of an issue PhoneCan has been pointing out since it’s beginning).  By the time the second iPhone hit the market at $199.99, now considered the “magic” number for smartphones, the damand for competitive pricing and deeper subsidy was strong.

As that demand for $200 price points settled onto the industry, carriers didn’t really sell much that was above the $200 mark, so they started discounting those high-end phones more to get them out the door.  Blackberry smartphones, Palm PDA phones such as the Centro and 755, and a few Windows Mobile 6.0/6.1 phones started selling better with deeper discounts.  Quickly, it became obvious that the ONLY way to sell these higher-end phones was with deeper discounts.

The Cost of Deeper Discounts

At some point, Verizon must have realized two things.  First, those users who didn’t get Internet plans for their smartphones, but occasionally (sometimes accidentally) got online were demanding too many credits.  For Verizon, usage charges (read: overages) are considered pure revenue, so they didn’t like having to make credits when someone accidentally used the web on their phone.  But the second thing they realized was that they could afford to discount smartphones more if they knew that they’d be making more off the users of those phones.

In comes required data plans.

Not only did they solve the problem of giving back money in the form of credits when the user accidently went online, but it solved the problem of increased subsidies - especially on secondary share lines.

Suddenly, deep discounts started being the norm on phones, while mandatory data started paying for it all.  In time, however, even the deeper subsidies started falling onto the more basic phones.  And, in time, the company tried forcing data plans onto the best of the basic phones as well.

While the basic phone with required data plans didn’t last very long, the effect it’s had on Verizon’s customers have altered the company’s product lineup.  If you go into most any Verizon Wireless store today, you’ll find it hard to locate the non-smartphones.  In most cases, this is intentional - smartphones make more money.  But in some stores, they’ve had to remove basic phones from display simply to show off all the smartphones that they sell on a regular basis.  Today, perhaps 10% to 20% of the carrier’s total phone model offerings don’t require a data plan.  A year ago it was more 50/50.  Three years ago, smartphones accounted for about 10% of the product line.  So while mandatory data plans may have disappeared from basic phones, the basic phones themselves have started disappearing instead.

As such, the cost of the carrier taking off more money on the phone purchase has opened the door for the carrier to make more requirements and demands, and has altered the product line in dramatic ways.  But that was just the beginning.

In Comes the iPhone

The iPhone has changed everything with Verizon Wireless.

Before the iPhone, Verizon found itself discounting more and more.  At some point, they’d started allowing primary and single lines which made them a little more profit to upgrade even earlier than ever before.  New Every Two credits - discounts given after 20 months under contract (previously 22 months), had gone from $100 in 2005, to $50, and down to $30 for some accounts to hold back the surging subsidies.  But it was getting out of hand, and something needed to change.

And then there was the iPhone.

The subsidy is HUGE - bigger than ever before at $450.  And Apple was so demanding, wanting more control over how things are done.  Subsidies were going to get out of hand.  So everything changed.

Gone were early upgrades.  Gone were New Every Two discounts.  Gone were one-year contracts.  Everyone will now get the same price, on the same schedule.  Joined with required data shifting to tiered allowances, Verizon has begun to set themselves up for more money.  They now know how much a phone subsidy is going to cost them in the near future, and they know how to pay for it.  And most of all, they now had the most popular phone in the world.  Everything is a win.

Except for the customer.

The subsidy discount has cost us a lot, as consumers.  Choice, reasonable fees, and loyalty to the customer have left the company forever.  Yes, you now get the killer discount on the phone, but you don’t get much else.

When we start to understand why phones cost what they do, we start to understand how much choice we’ve handed over to someone else.

Six or more years ago, a phone cost you a little and got you a long way.  Now, a phone most likely costs a lot, and gets the service provider all they ever wanted - complete control.