Verizon: 'it's a mistake' to abandon subsidized phone plans

Of the four major operators in the US wireless industry, Verizon seems to be the most hesitant in making a transition to phone installment plans. Last year, the company launched a plan called Edge in which customers agree to pay for the full retail price of their smartphone in monthly payments; however, Verizon has taken its time in making Edge competitive with AT&T's and T-Mobile's offerings. Big Red is quite a bit more cautious than its competitors, choosing instead to promote its traditional subsidized plans, which involves the customer buying a new phone at a discount in exchange for a two-year contract. Verizon executives have been pretty quiet about future plans, but CFO Fran Shammo shed some light today on exactly why his company isn't making such a huge leap.

Speaking today at the Deutsche Bank media conference, Shammo told investors, "we believe that the subsidy model is an extremely good model. It has done wonders for us in this industry. So I think to abandon that is a mistake." Shammo insists that Edge and More Everything plans are available primarily due to demand, and that it's ultimately up to the consumer to choose which one makes the most sense. "We aren't going to force our customers into anything," he said.

So why does Verizon look at phone financing plans differently than the rest of the carriers? Shammo outlines a few reasons. First, he makes it clear that his company is "taking a conservative approach," testing the waters while Edge is still in its early stages; since very few customers are upgrading their phones after the first 30 or 60 days, he wants to see how things go after the first 6-12 months. Intriguingly, he points out concerns that significant amounts of upgrades will result in a huge flood of second-hand handsets, causing "the pressure on the residual value is going to come down."

Additionally, Shammo mentions that Edge causes financial harm to customers who move to a different carrier before they're done paying off their monthly installments and get a high bill as a result. Many of his remarks seemed to indicate that he's already dealt with consumers who assume "non-contract plans" mean they can leave at any time without penalty; this scenario hurts not only the customer but the carrier as well: "It's going to be a very dissatisfying thing for the customer at the end of the day if they feel that they want to leave and they end up with a very large bill," he said. "If you look at history between the early termination fee and installment sale ... when customers leave your network for dissatisfaction the likelihood of them paying you your early termination fee is probably next to nil."

While Verizon continues to offer extra choices to those who want it, the carrier also doesn't want to completely shift away from a reliable revenue model which been sustainable for the past 13 years -- at least, not until it's had enough time to fully assess the risks of doing so. And given the fact that it added 1.6 million customers in the fourth quarter alone, it's not terribly worried about taking a lot of risks.