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Following T-Mobile? Here’s the real reason why Verizon ditched two-year contracts

Verizon Wireless, America’s largest 4G LTE carrier, in nothing short of a historical act, ditched its traditional two-year agreements yesterday. From the time the news made waves, it was met with both delight and disgust. Some are excited because of the reduction in their monthly pricing, while others are upset because they’ll now know what it means to pay full retail price for their smartphones over time. It’s hard to lose the $199 or $99 with two-year agreement setup for some who’ve delighted in carrier subsidies for so long.

And then, T-Mobile, America’s fourth-largest carrier at the time, decided to “abandon” traditional two-year agreements. Many see T-Mobile’s decision as groundbreaking, but T-Mobile isn’t exactly the good guy, here: after all, T-Mobile customers still had two-year agreements (even if they weren’t labeled “contracts”). If you signed a Simple Choice plan with T-Mobile, you still signed a two-year agreement – and if you decided to abandon the agreement say, after six months, for example, you owed the remaining balance on the full retail price of the product.

There are some advantages, such as the reduction of your phone bill after the price of the phone is paid, however, but you’d have to stick out the agreement for 24 months (or pay the retail price off in chunks) to see your monthly bill decrease. By the time you pay off the bill on the current smartphone, you’ll upgrade and get a new phone to get new updates and not find you’re left behind in the smartphone market. T-Mobile has been popularizing its plans with “no contract,” but you do sign a contract, even on the new agreements.

With that said, T-Mobile could’ve worded the marketing better, but the company marketed it this way in order to confuse customers and win numbers. T-Mobile has even marketed itself as “the UNcarrier,” but T-Mobile is still a “carrier” – in the same way that Verizon, AT&T, and Sprint are all carriers. Having “uncarrier” methods is a nice way to set yourself apart, but why not just say “we’re a carrier that acts like an uncarrier,” or something to that effect?

In any case, T-Mobile’s “no contract” plans have been said to spark a revolution in the carrier industry, so much so that T-Mobile’s JUMP (acronymic for “Just Upgrade My Phone”) led to AT&T’s “NEXT” and Verizon’s “Edge” plans. These were designed to give customers more choice and keep current customers so as to barricade the giant carriers against T-Mobile. T-Mobile has been winning numbers and causing headaches for the other carriers, but that’s not the reason why Verizon ditched its traditional agreements.

Why did Verizon ditch its traditional agreements? Verizon did the unthinkable not because of T-Mobile. T-Mobile’s “gains” in the industry didn’t affect Verizon enough to make the carrier move away from traditional contracts immediately. What moved Verizon to ditch traditional agreements is based on profit.

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Verizon has been subsidizing smartphone costs in the past, with the carrier footing $350 off of every smartphone: this is the reason why you pay a $350 early termination fee (or ETF) if you ditch the contract right away, $350 minus $10 per month x the number of months you remain under the agreement when you choose to end it. As long as you remain under the two-year contract, the $350 remaining balance on the iPhone 6 wasn’t mandated. Of course Verizon would take care of half the price of the smartphone: your $2,000 contract over 2 years would bring the company far more than the $350 it lost!

Now, with traditional contracts squashed, Verizon will no longer foot the $350 for each smartphone. This means that you will now have to foot the entire cost of the smartphone along with your carrier wireless plan each month. Of course, Verizon has also reduced the monthly line access fee from $40 to $20; the reason, because it is no longer footing the subsidy up front each month and mandating that you pay it back over the cost of two years.

With the new no-contract plans, however, you’re now paying for voice and texting (the monthly access fee), the data plan you select, plus the monthly installment price of the new phone. If you purchase a new smartphone plus select a 12GB data plan, however, you’ll pay $80 for the 12GB data plan, plus the line access fee ($20), plus the cost of the installment ($20-$30 additional depending on the smartphone price).

This gives customers the option to upgrade when they choose, and customers who pay off their phones the right to reduce their monthly bill after the last installment has been paid – but Verizon will no longer lose money on the retail price. In other words, Verizon will make money for the data plans and line access while zeroing out its financial losses. It’s a win-win for Verizon, and the fact that it appeals to many customers out there is just icing on the cake.

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