On Friday, Verizon (VZ) made a big change to how it prices mobile services, which will have significant repercussions throughout the U.S. mobile industry. Last week, in an unexpected move, the company decided to eliminate service contracts. Verizon wasn’t the first to do so—T-Mobile (TMUS) took that step two years ago—but it’s one of the biggest names in the mobile business to make that change.
The reason why the end of contracts is so important is because it gives consumers a much clearer sense of what they’re paying—and often overpaying—for when they buy a phone and sign up for a mobile plan. By getting rid of cellphone contracts Verizon will give consumers much more flexibility in choosing a phone, drive down service plan costs, and encourage a much more fluid phone market that will allow customers the opportunity to move between mobile operators.
When consumers sign up for a contract in the U.S., they typically get a steep discount on their phone—known as a subsidy—but carriers aren’t just eating that cost. They’re charging customers much higher monthly plan fees in order to make up for that subsidy.
Over the life of a mobile contract, those hidden fees can add up to much more than a phone is worth. And while under contract, consumers are locked into a chosen carrier for up to two years, even if its service is suffering or coverage declines. Many customers also continue to pay hidden fees after their contracts are up, essentially making mortgage payments on a phone they already own outright.
Verizon’s new rates will separate devices from their steep service costs. The company has reduced its access fee (which includes the cost of maintaining your phone number and unlimited voice and messaging) from $40 to $20 a month. Customers can also pick a data plan from 1 to 12 GB for $30 to $80 a month, which can be shared with other Verizon devices. The trade off is customers either have to pay the full cost of a new phone up front or buy it on installment. They can also option, however, to get a used phone online or bring on old Verizon phone to the network. And if they ever get sick of Verizon, they can simply leave, though they would still be responsible for paying off a phone they bought on credits.
However, Verizon’s new rates still aren’t cheap, but the company has never been an inexpensive carrier. It’s always charged premium prices for good coverage and reliability. The important thing to note is it’s now normalizing its rates, allowing customers to see how much their service plan costs versus the cost of their phones. From there, they can make a much more informed decision about whether Verizon’s higher fees are worth it.
Verizon latest move means it now joins T-Mobile by becoming entirely contract free, but there are plenty of signs the rest of the industry is heading in that direction too. AT&T now charges separate monthly rates depending on whether customers buy their phones on contract or pay for them separately. Last year the company even started forgiving contracts if customers moved over to unsubsidized plans such as its Next upgrade program. Now that Verizon is giving up the contract ghost, AT&T will likely follow.
The end of contracts won’t be all sunshine and roses for consumers, though. Many are likely to experience sticker shock as the new iPhone they thought only cost $200 suddenly is priced at $650. Also, even without contracts, operators are finding ways to lock customers into long-term commitments, either through installment plans or through new upgrade programs, which are really rental plans in disguise. T-Mobile’s Jump and Sprint’s All In plans charge you a monthly leasing fee, and after you complete its terms you can trade in that phone for a new one.
Finally, though a contract-less world means customers are free to move between carriers at their pleasure, in practice there is a technical limitation to that mobility. The big four operators use different 2G technologies in their voice networks and they run their 4G data networks on different spectrum bands. While there are an increasing number of universal high-end phones that can work on any network, many devices will only work on a specific carrier or set of carriers’ networks in the U.S.
Despite those limitations, the end of contracts and subsidies will only be a good thing for U.S. consumers. The U.S. traditionally has had some of the highest prices in the world. By separating the cost of the phone from the cost of the service, we’ll wind up paying more for our devices, but service plan prices will come down. Most importantly, we’ll be able to see exactly what we’re paying for.