You'd have to be living >in a cave to have missed the big Tuesday news that the iPhone is finally coming to Verizon (VZ)
Verizon officials have confirmed what SmartMoney was told by Verizon sales reps at a number of stores around the country: The company is ending its popular "New Every Two" program, which offers Verizon subscribers a credit of $30 to $100 toward a new phone every two years. As of Jan. 16, the company will stop offering the credit to new customers and won't re-enroll current customers in the program after their next New Every Two upgrade. The cell carrier is also putting the brakes on its permissive early upgrade policy, store representatives confirmed. (See video explaining the policy change.)
All of this adds up to more out-of-pocket costs for Verizon customers. With the New Every Two perk, a longtime customer with a $100 credit could get the iPhone4 for $99.99 half off its new-subscriber price of $199.99. When the program ends, new subscribers will no longer be eligible for those discounts. Existing customers will lose the perk when they renew their contracts (unless they renew before Jan. 16 but that date is well before iPhone orders will be taken). And with the end of the early upgrade program, customers who were previously eligible for discounted phones as early as 13 months into a two-year contract will now have to wait 20 months to get a new phone at the promotional new-customer price instead of retail (for the iPhone, that's currently a difference of $400).
The move comes as millions of cell customers are expected to jump to Verizon, now that the company has the highly-sought iPhone4. And none of them will be able to squeeze in before the company changes its policies, because the iPhone won't be available for new customers until Feb. 10. If Apple (AAPL)
Verizon's motives in the change are obvious, analysts say: Every time a customer upgrades his phone at a discount, there's a significant cost to the company. As of now, carriers lose money on every discounted handset, but make it up with income from a two-year contract. (That subsidy is why a new 16GB iPhone 4 costs $199 with a contract and $599 retail.) By forcing consumers to wait to upgrade or pay more to do it the company cuts its losses, without losing any income from the contracts. "The longer you can get customers to go between upgrading their phones, the stronger the profitability for the carrier," says Michael Hodel, an equity analyst covering Verizon for Morningstar. That point hit home for Verizon rival AT&T (T)
That's true for every other cell carrier as well, because most offer their own discounts and early upgrades. And as they roll out their own 4G networks and accumulate more smartphone subscribers, they're also likely get more stingy with upgrades, says Neil Strother, an analyst for ABI Research. That perk-tightening comes on top of extra fees and higher early exit charges. Sprint (S), for example, already tacks on an extra $10 monthly surcharge for 4G-capable handsets. Carriers have also doubled their early termination fees, charging up to $350 for smartphones, as a way to recoup money on the phone and contract revenue if you defect, says Andrew Eisner, the director of content for Retrevo.com.
Verizon is well positioned to be the first to adjust its upgrade program, Hodel says, because of its status it's one of the largest carriers and has built a brand around its service, not a single device. And in general, cell carriers and analysts expect customers to accept the growing costs without much of a fight. Consumers have already proven they're rabid for the the latest and greatest device and are willing to pay extra to get it. The week after Apple's announced its iPhone 4 in June, 2010, gadget trade-in site Gazelle.com saw a 5,900% increase in people seeking buyers for their soon-to-be-old iPhone, a trend that slowed but continued steadily over the next month when the phone hit stores.
One bright side, industry-watchers say consumers can expect the Verizon iPhone to spur more competition, which ought to improve networks and pricing. "The four national carriers are all fighting for the smartphone crowd in some way," says Ken Dulaney, an analyst with Gartner Research. What customers lose in discounted upgrades, they might gain with different pricing plans or faster networks. (Without the iPhone, Sprint and T-Mobile are likely to focus their pitches on network speeds and Android phones.) For example, AT&T is already touting its iPhone's capability to handle voice and data simultaneously (Verizon's can't) and the fact that its version of the handset costs a full 99-cents less.