This Verizon move should make Apple worry
Verizon (VZ) just announced a major shakeup in its phone plans. Starting Aug. 13, new customers will have to provide their own smartphones or buy one under an installment plan.
People will get unlimited voice and text messaging and a choice of data plans, from $30 for 1 gigabyte per month to $80 for 12 gigabytes. There'll be a $20 a month fee to connect a single phone, $10 for a tablet or $5 for a device like a smartwatch. The plans run month-to-month without contracts, although preexisting contracts shouldn't be affected.
Verizon is following the lead T-Mobile (TMUS) set a couple of years ago, and it all adds up to bad news for Apple (AAPL), Samsung and other high-end handset makers.
Until recently, consumers signed up for two-year contract periods. They'd typically choose a new phone, with an Apple iPhone, Samsung Galaxy or similar device running about $199. But that was a subsidized price, with a carrier such as Verizon, AT&T (T), T-Mobile or Sprint (S) footing the rest of the up-front payment for the phones, which frequently top $600.
But just like free lunches, neither were the smartphones free. Built into the carrier's monthly fees was a portion allotted internally at the handset makers to pay off the phone. Consumers would eventually pay more for the phone than it would have cost to buy it outright at retail.
However, the full price was effectively invisible to the consumer. The presentation made the cost far more palatable to buyers and allowed Apple and others to more easily sell the expensive handheld computer-phone combinations and boost their sales.
As consumers increasingly realize what the full cost is, the dynamics change. Many will likely choose a high-end phone and pay it off over time, or even right away. But that still leaves more price-sensitive consumers to consider keeping their existing phone for a longer period or choose a cheaper model.
That's bad news for the manufacturers. Apple, for example, depends on the iPhone for its financial strength. In its most recently announced quarterly earnings, the iPhone represented 63 percent of total revenue, versus 53 percent only the year before.
Investors were already concerned about future iPhone sales. Even though Apple sold 35 percent more units last quarter than in the previous year at the same time, its stock price has dropped by more than 12 percent, or $90 billion in market value, since the earnings announcement last month.
Signs have been appearing over the last few years that carriers might be tiring of financing subsidies to the manufacturers. Now that Verizon, the country's largest cellular company, has made it official, the potential impact could be sharp. And if AT&T decides to match the strategy, hardware makers could find themselves in an increasingly difficult situation.