Wednesday, September 24, 2008

Such a Deal: Wireless Service Without a 2 Year Commitment

Today’s Wall Street Journal (at B5B) reports that Verizon Wireless will now allow subscribers to buy unsubsidized handsets in exchange for which subscribers can avoid a two year service commitment. Before you consider this a major concession to consumer sovereignty recognize that Verizon has not announced a discounted service rate to reflect the elimination of a handset subsidy obligation.

The WSJ article notes that Verizon will sell a Blackberry handset for $430 in lieu of the subsidized price of $100. Because Verizon surely does not operate as a charity, the two year service commitment required of subscribers acquiring a subsidized handset, has at least a value of $330 to both Verizon and subscribers. Verizon must build in its monthly service rate sufficient revenue to recoup the $330 over two years. Subscribers slowly pay back the $330 handset subsidy through higher service rates.

When someone becomes a Verizon subscriber using an unsubsidized handset, these subscribers in effect pay a surcharged rate of at least $165 annually by foregoing a handset subsidy yet paying the same rate as handset subsidized subscribers.

Such a deal.

1 comment:

birtelcom said...

I'm not sure I understand your criticism of this pricing. Verizon's handset subsidy can be thought of as the same as any other volume discount. When you buy a 24-box case of detergent at Costco or Sam's Club, you often pay a lower unit price than you would for a single box, because the seller is able to generate the revenue from your purchase that would normally take 24 individual sales of a regular size box. Similarly, when you are willing to buy 24 months of $40 a month phone service all at once (by signing a two year contract), generating $960 of assured revenue to the company, the company is willing to give you a volume discount of $330 (in the form of a handset subsidy) off the $960 it would cost you if you bought only one month at a time. I'm not sure why you would expect to also receive the volume discount even if you don't make the large volume purchase.