Killing subsidies and raising fees a double-edged sword for Verizon

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Verizon’s move to kill smartphone subsidies and raise activation and upgrade fees will increase profit margins, according to analysts, but it risks losing customers and lowering ARPU. The nation’s largest mobile network operator confirmed last week that it will kill subsidies and two-year service contracts to new and existing customers, and instead will require all customers to sign up for its equipment installment plan. Verizon also raised its activation and upgrade fees from $20 to $30. Handset subsidies from carriers have plummeted precipitously in recent years as operators have moved away from contracts in favor of installment plans and leasing models for phones. Subsidies represented roughly 30% of phone sales last year, according to UBS, down from 46% in 2015 and 82% in 2014.

“With this move, we estimate just 10% to 15% of sales (representing business subs) will be subsidized going forward,” UBS Analyst John Hodulik wrote in a research note to investors Wednesday. “Verizon also increased its activation/upgrade fee to $30 from $20. We believe these moves will allow Verizon to maintain 2017 margins at similar levels to 2016 vs. our prior expectations for a decline. However, it will likely pressure subscriber trends as churn increases, aiding T-Mobile and Sprint efforts to take share.”


Killing subsidies and raising fees a double-edged sword for Verizon