Wednesday, April 11, 2012, 01:05 pm PT (04:05 pm ET)
Verizon Wireless to charge customers $30 for upgrading to a new phoneVerizon Wireless has decided to tack on a $30 surcharge when users opt to upgrade their mobile device. AT&T has indicated it will likely follow suit.
Pinched by the heavy subsidies it pays Apple to attract iPhone buyers, Verizon has announced it will charge upgrading customers an additional $30 fee when they qualify for a subsidized device and choose to switch phones.
In a report by Reuters, the carrier said it would be charging the fee to "provide customers with the level of service and support they have come to expect."
Verizon and other carriers have agreed to pay Apple industry leading subsidies of around $450 to attract new subscribers who want an iPhone, in order to lock them into a contract of two years or more.
However, when existing customers upgrade their phone, carriers don't earn as much additional new income; the customers merely continue to pay for the phone and data service they use.
Verizon's move may be intended to counter the shift of its existing smartphone customers, many of whom bought Android devices in 2010 before the company began selling iPhones. Customers who will be finishing their two year contract this year will qualify for a steeply subsidized new iPhone, but likely won't be paying anything additional for service because they were already signed up for expensive data contracts.
Verizon has been charging its customers more for Android phones, due to the limited clout Android manufacturers have in negotiating phone subsidies with the carrier.
Typical Android subsidies at Verizon range from $60 to $200 less than the $450 subsidy iPhone users get, making comparable devices more expensive up front and pushing low end Android phones into the the same price range as Apple's iPhone 4. Verizon is eating the difference, causing Android users to effectively subsidize the price of iPhones.
After an initial period of attracting new iPhone users and converting many feature phone customers to more expensive data contracts, Verizon is now finding itself with less low hanging fruit to take advantage of, as the market for smartphones begins to satiate demand, even as new alternative and regional US carriers gain access to the cash cow iPhone.
Chicken Little says the subsidy is falling
Last week, BITG Research analyst Walter Piecyk decided Apple's high iPhone subsidies wouldn't last, and issued a downgrade and a prediction of revenues $1 billion below consensus.
However, a year ago analysts were saying the same thing.
James Ratcliffe, an analyst at Barclays, estimated last January that Verizon would sell just 9 million iPhones in 2011, spending $350 to subsidize each sale, for a total of $3.2 billion.
Ratcliffe also expected AT&T to sell just six million iPhones in 2011, down from around 15 million in the previous year. He also figured that AT&T's subsidy will drop from $400 to $350 per device due to the end of its exclusive deal with Apple.
In reality, AT&T sold 9.4 million iPhones just in the fourth calendar quarter of 2011, and Verizon sold 4.3 million in the same quarter. Neither carrier has cut its iPhone subsidies, even as Sprint and a variety of new carriers have joined Apple in selling iPhones in the US.
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