Posted by: Olga Kharif on September 24, 2008
A huge sea change happened in wireless this week. Verizon Wireless has stopped requiring subscribers to sign up for long-term service contracts.
The drawback is, if you go month to month, you have to buy new phones at full retail, vs. subsidized price. The upside is, you can end your service at the end of any month (more details are available here). Existing customers will need to wait for their current contracts to run out before moving to month-to-month plans.
Here’s why this is huge news: In effect, Verizon Wireless is voluntarily giving up on a very effective way of retaining its subscribers. Until now, carriers threatened users wishing to switch to competitors with early termination fees, typically ranging from $50 to $175. Lately, though, Congress, the courts and the Federal Communications Commission have been putting pressure for carriers to get rid of these fees or to make them tied to actual costs carriers incur in signing up subscribers. Verizon’s move is a response to that pressure.
What remains to be seen is just how many people elect to pay for their handsets in full in order not to have to sign contracts. I think that that number will initially be small, but it could grow over time to a sizable portion of the population.
In Europe, the majority of users are, in fact, already using such month-to-month plans, which, in this country, have long been the domain of prepaid carriers like Leap, MetroPCS and Virgin Mobile. In the U.S., where various carriers' networks differ so widely that a phone purchased to work on Verizon Wireless won't typically work on AT&T, the situation may be different.
But once other carriers follow Verizon's suit and offer month-to-month plans, that should increase price competition among wireless carriers. In particular, it could be a blow to the likes of Leap and Metro, which have differentiated their service through prepaid.
The move could also have big implications for handset makers. If people have to buy their own expensive handsets, they may not replace them as often. That could affect sales growth.