Analysts Consider Effect Of Verizon’s Contract Changes

January 11, 2017 - Written By David Steele

Investment analysts have been considering the effect of Verizon Wireless’ changes to how it offers devices and contracts to customers. Verizon recently announced that it was removing handset subsidies and traditional two-year contracts in favor of equipment installation plans for both new and upgrading (retail) customers. America’s largest carrier made the change on January 5, 2017 together with an increase of the activation and upgrade fee from $20 to $30. The consensus within the investment community is that the changes Verizon has made should increase profit margins but at the risk of losing customers and squeezing Average Revenue Per User (ARPU), lower. UBS’ John Hodulik wrote to investors that Verizon’s change means that he expects only between 10% to 15% of handsets sold by the carrier will be subsidized going forwards, down from 30% in 2016, 46% in 2015 and 82% in 2014. The remaining subsidized handsets are being sold on business contracts. However, Hodulik believes that the increase in upgrade or activation fee will help the company maintain a similar profit margins into 2017 as in 2016, whereas until January he was forecasting a reduction in profit margins. Hodulik added a note of concern to his research note, highlighting that Verizon is likely to suffer from competition from the two smaller national carriers, Sprint and T-Mobile.

Walter Piecyk from BTIG Research believes Verizon’s ARPU will deteriorate because equipment installation plans are sold at a reduced rate to customers compared with traditional contracts: “The popular shared data plans charge $40/month for access to subsidized phone customers, but only $20/month for BYOD and phone payment plan customers.” Piecky went on to explain that he estimated a little over 40% of Verizon’s post-pay customers were on an equipment installation plan, compared with around 70% for T-Mobile, which means the business is going to experience a significant reduction in ARPU as more and more customers are migrated to the new style of plan.

Verizon has maintained that they are positioning themselves more towards what the company calls the “quality customers,” meaning those who value the quality and reliability of their network together with their customer services, and those who are happy to pay more than some competitors in exchange for this reliability. However, the changes in the market started by T-Mobile’s Uncarrier movement have caused Verizon to change how it sells smartphones and forced plan rates down. Ultimately, this has been good news for customers but it has put pressure on carriers to stay competitive.