As we predicted, Verizon have announced a number of changes to their Edge handset upgrade program, designed to improve competitiveness with the AT&T Next plan. Before I look at the detail under the skin, let’s take a moment to look at the Edge and Next plans. These are essentially ways to speed up the upgrade process for customers: when taking out a new contract, a customer can pay extra per month for the opportunity to upgrade a device sooner than the two years. The amount paid over and above the airtime varies depending on the handset the customer is buying; customers can upgrade after they have paid off a certain amount of the handset’s retail price. In effect, both Edge and Next are a way for the customer to pay somewhat more than a traditional contract in exchange for earlier upgrades. For upgrading customers, the carrier gets to keep the old device (and presumably these may be refurbished and then sold on to a new owner). Nevertheless, customers like the idea of early upgrades and spreading the cost of a purchase across a number of months. Approximately half of AT&T customers buy their handset using Next and one in five of Verizon’s customers use Edge.
Getting back to Verizon’s changes to Edge, it’s increasing the number of monthly payments customers must make from twenty to twenty four, which means the monthly payments are a little lower. However, in order to upgrade, customers must now pay off three quarters of their device cost rather than the previous sixty percent. Verizon has also tweaked its More Everything shared service plan; those between 500 MB to 8 GB now receive a $15 per line discount, where it had previously been $10 a month. Higher data plans still receive a $25 discount per line, which has not changed. With these new discounts, Verizon’s plans are now only around $10 a month more expensive than AT&T below 10 GB of data a month (the same for 4 GB and 6 GB plans). Verizon is hoping that the improvements made to their Edge plan should narrow the gap between Verizon’s sales compared with AT&T’s Next.
From a business perspective, these changes will help Verizon’s EBITDA figure, or Earnings Before Interest, Taxes, Depreciation and Amortization. This is a ratio often used to analyze profitability between different businesses in the same industry. It eliminates and differences between financing and accounting decisions and is a common metric for cellular carriers as these have expensive assets (the network masts) that are written down in value year over year. EBITDA should be carefully considered because it does not take into account the cost of replacing or upgrading the assets (in other words, upgrading the network). It’s something of a synthetic measurement because it doesn’t measure cashflow, that is, the amount of cash coming into a business. Here, the changes Verizon is making to their plans should improve the EBITDA ratio but reduces the cash it takes in from customers.
And one more thing… Sprint has polished their “iPhone for Life” leasing scheme and is now more advantageous to the carrier. These changes are designed to take advantage of the new Apple models and customers pay so much a month to lease the device, either to return it at the end of the contract or take out another. Leasing schemes typically boost profits, being largely cashflow neutral over the duration of the contract but the network gets to keep the device.