Verizon's McAdam leaves door open to dropping wireless contracts

Verizon Communications (NYSE:VZ) CEO Lowell McAdam said Verizon Wireless could easily drop wireless contracts in the wake of T-Mobile USA's decision to do so--if consumers start asking for it. His comments reiterate what other top industry executives have said: That they will be watching to see how the market reacts to T-Mobile's new model and will respond accordingly.

"I'm happy when I see something different tried," McAdam said on the sidelines of an event to raise awareness for Verizon's "Powerful Answers" initiative, according to CNET. "We can react quickly to consumers' shifting needs."

As part of T-Mobile's "Un-carrier strategy," T-Mobile CEO John Legere has said the company is going to eliminate the prepaid/postpaid distinctions by just going with a no-contract offering without device subsidies. Customers can either buy their smartphone outright for the full cost of the device or they can make a down payment and then pay for the remainder of the cost of the device in monthly installments. Additionally, customers can bring unlocked devices to T-Mobile. However, T-Mobile is still offering traditional contracts through national retailers like Walmart and Best Buy.

Since T-Mobile first announced in December its plans to shift, executives from other carriers have said they are open to T-Mobile's model. "We have thought about it and we are going to take a kind of a wait-and-see approach," Sprint Nextel (NYSE:S) CEO Dan Hesse said during the company's fourth-quarter earnings conference call, according to a Seeking Alpha transcript. "We are going to watch what happens in the market, how customers respond to it and we evaluate options and alternatives going forward." Hesse said right now most customers seem comfortable with buying a subsidized device in exchange for a two-year contract. But he said that "as the industry evolves, we'll evolve with it."

Additionally, AT&T (NYSE:T) CEO Randall Stephenson said in January he liked the approach T-Mobile is taking, and said he would watch the development with interest.

Most of the Tier 1 carriers have long used the subsidy model because it allows them to lock customers into two-year contracts, which deliver reliable--and usually higher--streams of monthly revenue during the length of the contract. In exchange for that, they subsidize the cost of smartphones, with many high-end smartphones costing $200 or so for consumers.

Carriers, however, pay a price for subsiding smartphones, especially Apple's (NASDAQ:AAPL) iPhone. When customers upgrade to smartphones en masse, as they tend to do during the holiday shopping season in the fourth quarter, carriers' margins drop. Over the past several years the Tier 1 carriers have made changes to their upgrade policies and fees to mitigate that cost.

For more:
- see this CNET article

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