By Kim Hart - 12/18/09 08:52 PM EST
Term contracts with ETFs are mutually beneficial. They benefit consumers by enabling them to obtain access to advanced services at a significantly lower up-front cost, and they benefit Verizon Wireless by providing a steady, predictable stream of revenue that allows Verizon Wireless to recoup the extraordinarily expensive investments required to support its wireless network and operations and the cost of providing the devices at a substantial discount. When a customer chooses to terminate early, the ETF helps Verizon Wireless recoup a portion of these costs.
The cost difference between Verizon Wireless’ purchase price and the price it charges to customers varies among the numerous devices that Verizon Wireless sells. On average, the cost differential, i.e., the difference between the amount Verizon Wireless pays manufacturers for the device and the price it charges to customers on term contracts, is more than twice as large for Advanced Devices (now subject to an ETF with a starting point of $350) than it is for more basic devices (which continue to have a starting ETF of $175).
In addition to the difference between the purchase and selling prices of devices, Verizon Wireless incurs additional costs to sign up customers, such as advertising costs, commissions for sales personnel, and store costs. These costs are higher for Advanced Devices: for example, it takes more time (and hence increases the cost to Verizon Wireless) for sales and customer care representatives to handle customer inquiries regarding the complex advanced features and functionalities of Advanced Devices.
Verizon Wireless also makes significant ongoing investments in its broadband networks and services that support Advanced Devices. These substantial costs, as well as other related operating costs, are put at risk when customers fail to fulfill a contractual term to which they agreed when they signed up for service and received an Advanced Device at a heavily discounted price.
The mix of devices Verizon Wireless sells has shifted dramatically towards these
Advanced Devices. As a result, the overall cost to the company for providing and supporting devices to customers at low up-front cost has increased substantially.
The two-tier ETF structure reflects the differences described above in the costs and risks associated with Advanced Devices versus regular devices. The $350 ETF for Advanced Devices reflects the substantially higher costs and risks of providing mobile broadband service. Verizon Wireless incurs these costs with the expectation that customers will enable Verizon Wireless to recoup them over time. Indeed, a customer with an Advanced Device on a voice and data service plan typically agrees to pay substantially more in monthly service fees, as compared to a customer with a more basic phone on a voice-only plan.
The new ETF structure with an ETF starting at $175 for regular devices and at $350 for Advanced Devices reflects these differences. The $350 ETF does not fully compensate Verizon Wireless for all these costs, particularly for customers who terminate at a relatively early point in the contract term, but it helps the company recover at least a portion of them.