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Summary

Verizon recently changed the terms of its Edge device-financing program to require that a device be paid off in full before a user is eligible to upgrade to a new device, essentially eliminating early upgrades. Verizon prefers the traditional subsidy model but offers Edge financing to meet consumer demand – and Edge is growing in popularity. This change to the upgrade policy for Edge could serve to moderate its growth.

New Edge upgrade terms could stunt take-up

On Verizon’s 4Q14 earnings call, Verizon’s CFO said that the company was planning to increase take-up of its Edge device-financing program to around 34% or 35% in 2015, up from 25%. But Verizon underestimated Edge’s growth; take-up in 1Q15 was already 39%, and the figure is expected to reach 50% for 2Q15. These increases are substantial; just a year ago, in 1Q14, Edge take-up was just 15%.

As take-up of Edge has been increasing, Verizon has been changing the upgrade requirements – each time to less favorable terms for the customer. When the program started in July 2013, customers were allowed to upgrade any time after 30 days as long as 50% of the device price was paid off. Verizon amended the percentage that must be paid off to 60% in 2Q14, 75% in 4Q14, and now 100% in 2Q15.

Verizon somewhat reluctantly waded into device financing in the first place. The operator prefers the traditional subsidy scheme, but provides Edge financing simply because of demand, in order to give customers a choice. In the beginning, executives didn’t think there would be much interest in it from customers.

Now that there is proven (and increasing) interest, Verizon is making it more difficult to upgrade early by requiring that 100% of the device be paid off before upgrading. At the same time, competitors T-Mobile and Sprint are expanding upgrade opportunities for customers by introducing leasing options and shorter terms for upgrading in their own device-financing programs.

Verizon might be trying to steer customers back to the traditional subsidy model. Unless an Edge customer is able to pay off the remaining balance on their device early, in full, they will keep the device for the same 24-month minimum period as for a traditional subsidized phone contract.

At the very least, Verizon is probably trying to moderate take-up of Edge and slow the upgrade cycle. From the beginning, Verizon took a conservative approach to Edge financing in order to get a feel for the residual value of the devices and the amount of uncollected payments. Verizon uses these two factors to decide how much revenue to record over time for each device. Verizon’s change to requiring 100% of the device to be paid off before an upgrade might mean it is recording less revenue than it wants to for devices on the Edge program. Slowing the upgrade cycle in this way helps limit the number of devices with lower revenues attached to them. Verizon is also trying to offset the risk of uncollectable payments by having a strict credit policy to qualify customers for Edge. Verizon does not use third-party financing for its Edge program; it takes on all of the risk itself. The fewer customers on the program, the less debt risk it has in this area.

Requiring Edge customers to pay off their devices in full before upgrading has another advantage for Verizon: Since the device is fully owned by the customer, it doesn’t have to be traded in for an upgrade, meaning that Verizon reduces its dealings with second-hand devices. Verizon’s concern is that with all of the upgrade activity in the market, it might get flooded with secondhand devices, bringing down the secondhand device’s residual value. However, Verizon still gives customers the option to trade in their device for a bill credit. Verizon also suggests that customers donate their devices toVerizon's Hopeline initiative, which helps victims of domestic violence, or give the paid-off device to a friend or family member to activate through a SIM-only service plan, which Verizon has only recently begun offering to its customers.

Whatever Verizon’s reasons for amending its policy to require devices to be fully paid off before an upgrade, this change sets it apart from its peers in the market, which offer device financing with early upgrades. It can be seen as another example of Verizon’s “pay a premium for quality” pricing strategy.

Appendix

Further reading

Global Handset Financing Programs Tracker: 1H15, TE0009-001421 (May 2015)

“Handset financing: Operators need to align financial goals with end-user expectations when devising handset policies,” TE0009-001231 (July 2013)

“Handset financing: US operators compete on upgrade programs to boost take-up of latest smartphones,” TE0001-000571 (August 2013)

Author

Kristin Paulin, North & South America

kristin.paulin@ovum.com

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