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Will Dropping Contracts, Subsidies Help or Hurt Verizon?

Verizon Communications Inc. (NYSE: VZ) announced Friday that it is eliminating its subsidized phone contracts and will offer a two-year service plan instead. Under the new plans, the company’s subscribers will have to pay the full cost of the phone. The new plans go into effect on August 13.

Under the new plan, subscribers will pay $20 a month per device and add one of four data package charges ranging from $30 to $80 a month, depending on the amount of data a subscriber selects. The data package can be shared by up to 10 devices. Subscribers can either pay the full price of the device at the time they sign up for the contract or pay the full price in equal monthly installments. Current subscribers may choose to keep their current plans or move to one of the new plans.

The new plans are similar to the “Uncarrier” plan introduced by T-Mobile USA Inc. (NYSE: TMUS) about two years ago, and T-Mobile CEO John Legere was quick to point out the similarity in a tweet:

And the carriers are at it again… Copying our #uncarrier moves once more and repackaging their half-assed versions as “new.”

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In mid-July, T-Mobile introduced a new family plan in which each line gets a minimum of 10 gigabytes of data. The plan costs $100 for two lines of service, with each line receiving unlimited voice calling, messaging and 10 gigabytes of data. A third line with the same access can be added for $20 per month, while a fourth line can be added for free through September 7.

In late June, Sprint Corp. (NYSE: S) introduced its “All-In” plan that includes a smartphone plus unlimited voice, text messaging and data. The plan’s price for voice, text and data is $60 plus $20 a month for a two-year lease on a smartphone and a one-time $36 activation fee.

AT&T Inc. (NYSE: T) has also been moving away from the subsidized device model and introduced its Next installment plans earlier this summer.

There is no question that the device and data packages are getting simpler. What customers pay is not necessarily less, but the number of subscriber choices is getting smaller.

The pricing pressure is greatest on Verizon and AT&T, and what the two giants eventually will have to do is maintain a price at which they can turn a decent profit and that will depend on the quality of their service and support. Wireless carriers are notoriously poor at customer service, usually ranking right down there with pay-TV providers at the bottom of customer satisfaction surveys.

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By Paul Ausick


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