5 April, 2016
Verizon Wireless Upgrade Fees
It's official. Yesterday Verizon Wireless instituted upgrade fees for a wide class of device upgrades that were previously unbilled (free as in beer). The reason given for upgrade fee implementation was "to help cover our increasing support costs associated with consumers switching their devices." However, it doesn't take much more than a careful reading of Verizon's 2015 fourth quarter earnings report to understand why they are doing it.
Upgrade Fees
Verizon Wireless now charges device upgrade fees for five of the six possible ways a customer can upgrade their mobile device. Prior to yesterday, Verizon Wireless only charged an upgrade fee for one of those six routes.
In order to be able to discuss the current Verizon Wireless upgrade fees, we need to know what the fees are for all six of the ways in which a current customer can upgrade their Verizon Wireless device. The table below lists the upgrade fees for each of the six paths to a new wireless device on the Verizon Wireless network. The upgrade fees listed in red are new as of 4 April, 2016.
Upgrade Type
Fee
2 Year Contract
$40
Retail Purchase
$20
Installment Purchase
$20
Device Payment Annual Upgrade

$20
iPhone Annual Upgrade @ Apple Store


$20
Customer Provided Equipment

$0
There they are, in black and too much red.
Alright. The long standing upgrade fee for customers opting for another two year contract remains at forty dollars. In the "contract perestroika" of 2015, two year contracts finally crumbled, largely under the weight mobile phone discounts on devices costing $750 or more. Verizon Wireless is no longer offering two year contract pricing to new customers, only to existing customers. The hardware discounts offered to existing customers are still on the order of what they have been for many years. As a quick example, the retail price of the Apple iPhone 6s today is $649.99. If you are currently a Verizon Wireless customer and wish to renew your two year contract in exchange for the hardware discount, the Apple iPhone 6s will set you back just $199.99. That two hundred dollar price point for the upper echelon, with the $299.99 price point for the deluxe model (iPhone 6s Plus or Samsung Galaxy S7) hasn't budged since the U.S. market was crazy for the Motorola Razr ten years ago.
But the two year contract is now passé, retro, so out of vogue. Customers are now expecting to pay full retail price for wireless devices in order to gain the freedom of upgrades when needed, or desired, or to be able to abandon a carrier (churn in industry speak) at will. Or to have the carrier finance their device purchase in easier to swallow monthly payments.
This is where Verizon Wireless has, in an interest to sustain revenue growth, introduced device upgrade fees.
Those paths to device upgrade that involve purchasing the phone with cash (retail purchase), on the carrier-financed plan (installment purchase), on the annual upgrade plan and on the Apple financed upgrade plan (iPhone Upgrade Program) are all now subject to a twenty dollar upgrade fee. All of these are paths in which the consumer is paying the full retail price (or leasing the handset on the annual upgrade paths) for the device. And, as of yesterday, Verizon Wireless is now charging customers twenty dollars for the privilege of paying full price for the new mobile.
Or, by the official explanation, for moving the subscriber's SIM card to the new device. But you don't even get that service if the handset is delivered to your door.
Before we move on to explaining why, let's focus on that last category—the category without an upgrade fee.
Verizon Wireless is still allowing a customer to provide their own equipment for a no charge upgrade (customer provided equipment). That's an ESN change (Electronic Serial Number) in their language. If you can purchase a retail device that works on the Verizon Wireless from another source, they will happily let you move your SIM card without charging you twenty dollars for the privilege. You can even walk into a Verizon Wireless store, and they will move your SIM card for you, all without charge. Must not be that costly to move the SIM card, eh?
Well, they do know something about their network ... there are very few phones that you can buy at retail that work with a Verizon Wireless SIM. So the problem isn't that large for new handsets (used mobiles will fall under an ESN change without upgrade fee). However, we have, prior to the upgrade fee implementation, described how to activate the Moto X Pure Edition (2015) on Verizon Wireless. The Moto X Pure Edition is one mobile that can be purchased elsewhere for use on the Verizon Wireless mobile network (along with all the other wireless networks).
Why?
The real question here is "why Verizon Wireless would be compelled to increase fees on existing customers?"
The answers to that question are found in the slide deck from the 2015 Verizon Q4 Earnings Results (1). The 2016 Priorities are listed on slide (ominous) 13 as: or, if we were to highlight the key priority:
Ok, there it is in "Verizon Red," new revenue streams. But that still leaves us asking "why?"
The answer is there, just a little deeper in the financial report.
Postulate: Wireless industry revenue growth is primarily driven by the novel, the new.
Device manufacturers like Apple or Samsung increase profits by selling more handsets. Google increases revenue by showing ads to more people using search. Wireless network providers, like Verizon, increase revenue by selling more services to more customers.
And therein lies the challenge.
The United States isn't producing a wealth of new wireless subscribers. Wireless subscriber penetration in the United States was 110% as of December, 2014 (2). That doesn't bode well for growth, there are already ten percent more active subscribers than there are citizens in the United States (think personal mobile plus work mobile). There will be limited growth, and limited revenue growth, from new customers who have not been wireless customers previously.
Well, if growth isn't going to come from non-subscribers becoming subscribers, maybe growth will come from subscribers changing service providers, a customer switching from T-Mobile to Verizon Wireless for some real, or perceived, benefit like price or network coverage. This gerrymandering of current wireless customers is known as churn. Verizon Wireless reports a churn of 0.96% for 2015 (1). With 112.1 million postpaid subscribers at the end of 2016, that almost one percent churn, if it all went their way, would bring only 1.1 million customers. But even that's not many new customers, and under the 2015 fourth quarter growth of 1.5 million new postpaid mobiles.
No, substantial growth isn't coming from customers switching wireless networks for better coverage or a better price on data.
Oh, but wait, is it data that has been driving revenue growth?
Remember ten years ago (admittedly a wireless age) when it was all about the minutes? Consumers where using their mobile phones as, you know, actual telephones. Recall what contract plan Verizon Wireless was pushing ten years ago—the America's Choice/America's Choice II contract plans. A plan for which data use was billed as airtime minutes—airtime minutes that were not metered after nine in the evening or between 9 PM on Friday night and 6 AM on Monday morning. Not a bad, but remember that in 2006, the Motorola Razr was the hot 3G device—not exactly a great platform for using Instagram.
And then came June 29, 2007.
The first day of iPhone sales. The day the world realized that the mobile phone could be so much more than a one-to-one communication device. And the (approximate) day that data became the new growth potential for wireless network operators. It was about this time (very approximate) that Verizon Wireless began the billable data switch for all new 3G phone activations. And that brings us (roughly) to the world in which we live today, where the only thing sold is data, talk and text are a given.
Lemma: The data network and data services have been fueling wireless network revenue for the recent past.
That's great. Something new to keep the party going.
But wait ... data isn't new. But data use is still growing, right? Yes, but with the caveat that that growth is approaching an asymptote.
Monthly wireless data usage by year.
Figure 1 Monthly wireless data usage in billions of megabytes by year. While data usage continues to grow, the growth rate is slowing dramatically (2).
These data are also visible in the Verizon Wireless earnings results in a slightly different way. The key observation from that report is that the penetration of LTE mobiles is 79.2% (1). That is up over the previous year by 13% from 66% at the end of 2014. And that rate of growth cannot continue. Only 84% of all Verizon Wireless devices are smartphones, another 13% growth year for LTE devices would push 92% of the network users to LTE devices. That would up 8% for smartphone users. The number of smartphone users increased by only 5% in 2015.
LTE smartphone penetration is slowly approaching a plateau on the Verizon Wireless network. Network users have become accustomed to their data activities and those data activities are not expanding (see lemma above). Those who want smartphones largely have them, the growth there will be limited. Those customers who are already using data on the network are stabilizing at the amount of data they use on the network (no Wi-Fi consideration here). And stabilization does not bring revenue growth (see postulate above).
Thus, Verizon Wireless growth is stagnating unless there is something that will draw more data usage to their network. Ever wonder why wireless network providers are interested in pushing new technologies (all apologies to Dave Cutler) like the 5G network? New bandwidth equals new possibilities, new possibilities equal increased consumption and increased consumption equals increased revenue.
But without that 5G network and subsequent applications, or new, exciting advances in video sharing on the LTE network, data usage is stalling along with revenue
With limited growth potential to provide new or expanded services, revenue is needed somewhere else—thus the focus on new revenue streams. One of which is the upgrade fee.
During 2015, Verizon Wireless saw 46.6 million retail postpaid device activations (1). That's 46.6 million activations which will now incur an upgrade fee of, at least and most likely, twenty dollars. Let's assume that all device upgrades are of the non-contract type (this is optimistic, I know, but Verizon reports that 67% of fourth quarter 2015 activations were on installment plans, the other third would be split among cash and contracts) and incur the $20 upgrade fee. And let's assume that there are an equal number of upgrades in 2016 (not exactly right because there will only be three quarters of upgrade fees in 2016—think of the future). That's
46.6 million device upgrades x $20 / upgrade = $932 million
And if we compare that to the roughly $92 billion in wireless revenue generated in 2015, that's a tidy 1 percent increase in revenue for the coming year (or four quarters since there starting a quarter into the current fiscal year—however you'd like to view it).
Conclusion
That's it. The newly introduced twenty dollar upgrade fee at Verizon Wireless is a measure to ensure an increase in revenue of one percent over the next four quarters. An increase in revenue that is necessary as the demand for Verizon Wireless network data services slows in growth. A trend that we are likely to see until the advent of a new demand for the current network generation or a new network generation and only imagined possibilities.
Since the upgrade fee is tagged to mobile phone activations, it will be challenging for Verizon Wireless customers to avoid. There are a few unlocked LTE devices which run on the Verizon Wireless network that can be purchased directly from the manufacturer, but not many. The other way to procure new-to-you hardware is the secondary or used market. Activating a used mobile will also fall into the ESN change category and not be subject to an upgrade fee.
And since a 5G rollout is still well in the future, don't be surprised if you see something like this again from Verizon Wireless or other wireless network carriers.
References
(1). Shammo F. 2015 Verizon Q4 Earnings Results. Verizon Wireless, 2016.
Home | Privacy Policy |  Page generated in 0.00592 seconds.