by Bill Snyder

Verizon Is Picking your Pocket for $1 Billion

Apr 12, 20123 mins
MobileSmall and Medium BusinessSmartphones

The bargain prices you pay for smartphones are much less of a bargain than you think. There's a huge hidden profit for carriers like Verizon, AT&T and Sprint that we consumers never hear about.

It’s easy to get angry when someone wants you to pay for something that’s been free or very cheap in the past. And at first glance, it appears that Verizon is doing just that this week by imposing a $30 fee on subscribers who upgrade to a new phone. It turns out though, that you’ve always been paying that fee. You just didn’t know it. Here’s why:

When you buy a smartphone from Verizon, or any of the other major carriers, you’re getting it at a huge discount, which the industry calls a subsidy. Your $200 or $300 phone actually costs the carriers as least twice that amount. I’m sure you readers are far too savvy to think the discount is out of the goodness of someone’s heart. It isn’t, of course. Carriers make their money on the voice and data fees you pay every month.

That makes sense, right? They give you an expensive phone at a relatively low price, and you return the favor by paying them back via monthly charges. However, there’s a gigantic gotcha built in.

Let’s say that it takes 18 months for you to “pay back” the subsidy. If the setup were fair, at that point your bill would go down. But it doesn’t. The last six months of your two-year contract are no cheaper than the first 18 months when you were repaying the subsidy. So it’s all gravy for the carrier. And by tacking on a $30 fee all Verizon is doing is reducing the subsidy and increasing its eventual profit margin.

Indeed, that extra margin will add up to an extra $1 billion a year for Verizon, according to BTIG Research Analyst Walter Piecyk, who was quoted by Wireless Week. While it’s true that subsidies (particularly for the iPhone 4S) hurt the company’s earnings recently, Verizon still registered a profit of more than $2 billion in 2011.

If the market for wireless services were truly competitive, consumers who didn’t want to pay that extra $30 fee would simply go somewhere else. But there’s almost no place to go. All three of the other major carriers already charge an upgrade fee and all milk customers by refusing to reduce their monthly bills when the subsidy has been repaid. Sprint and AT&T charge $36 in upgrade fees, while T-Mobile sticks you with a bit less — $18.

Sure, there are regional wireless carriers. But for many people, the service they provide is simply too limited, particularly if you want to use a smartphone.

Verizon is being greedy, of course. But the problem is much larger than that. Monopolies and near-monopolies, particularly when they’re practically free of government regulation, are free to squeeze the consumer. Think about that the next time you pay your bill — or when you vote.