Petition to Verizon: Contracts Explained

As the petition I started on Change.org has gained tremendous momentum this week, I’ve been flooded with questions and comments about it. “What exactly do you want them to do?” and “Can’t you already get service without a contract?” and “Do you think everyone should have to pay full price for their phone?” and several others.

So, I wanted to expound upon what I originally wrote and answer those (and other) questions.

As I wrote in the petition, I want them to get rid of contracts as the default way for selling service and create a way for consumers to purchase their phones affordably. It’s true – right now, you can purchase a phone without contract, but not without being badgered about why you won’t renew your existing contract (or sign one as a new customer). Why? Because Verizon’s salespeople ONLY earn commissions on new and renewed contracts. If you go to your local Verizon store and pay $650 for your phone, they get nothing. All of their business metrics revolve around contracts because it makes it easier for them to forecast future revenue.

Not only do I want them to make it more affordable for people to purchase a device and service without a contract, I want them to come up with a way for existing customers to buy out their existing contract for a pro-rated fee. Right now, if you cancel your service two months into your 24 month contract, you pay $350 – the same amount you’d pay if you cancelled your service 23 months into a 24 month contract. That Early Termination Fee (ETF) is part of your contract so they can recoup the subsidy – the discount they gave you when you purchased your device – if you end your contract early. They’re a for-profit, publicly traded company, so we know they have to turn a profit. But even AT&T realizes the error in a flat-rate termination fee; they deduct $10 from your ETF (which starts at $325) for every month you maintain service. When you’re 20 months into your 24 month contract, for example, your termination fee is now just $125. That’s much more reasonable, considering they’ve made back that subsidy as you’ve paid your bill for the last 20 months.  

But here’s the problem – if you never leave Verizon, even after your contract has expired, you’re still paying the same monthly cost for your service. That monthly cost – your rate plan – was designed to make back that discount they gave you on your phone two years ago. Put another way, the subsidy they have to recoup is built into your plan. So after your contract is over, you’re still paying for that subsidy. That phone you paid $200 dollars for when you signed your contract ends up costing you hundreds more, the longer you keep it.  

Can everyone afford to pay full retail price for their phone up front? Of course not. At least not with the way Verizon prices them now. Most of today’s smartphones are $550 - $650 outright. Since I started this petition, Verizon has announced a device payment plan to let you make monthly installment payments (over 12 months) towards a phone at full price, as long as it’s over $350. That’s definitely a step in the right direction. A lot more people can afford an extra $50 a month than can afford $600 all at once. Let’s hope there’s more progress on this to come.

Even still, we get back to that monthly cost for service. If you buy your phone at full retail price, why should you pay the same amount as the person who signs a contract, which Verizon has to slice off a portion of to recoup their phone subsidy?

For the fun of it, let’s do some simple armchair math here, to give you an idea of that cost. You sign a two-year contract which forces you to pay $350 if you cancel early.  You pay $200 up front for your phone, which has a listed retail price of $650. That means Verizon “subsidizes” $400 of it. To recoup that $400 over two years, they build $16.66 a month into your rate plan. Problem 1: Once that two years is up, your bill doesn’t drop by $16.66 per line, does it? Absolutely not. Problem 2: Like the example earlier, if you go 20 months into your contract and decide to cancel, you’ve technically paid $333 towards that $400 subsidy. In order for them to make it back, you should have to pay $67 bucks. Instead, they still charge you the $350 early termination fee and profit an extra $283.

So, that’d be third thing I want them to do: once your contract expires (or if you pay full price for your phone), your monthly service should cost less, because they’ve already recovered the subsidy for your phone (or there’s no subsidy to recoup if you paid full price).

My petition and those who sign it aren’t driven by a sense of entitlement. We’re not asking for something for nothing. We’re asking to be treated fairly and given reasonable options, especially since most of us aren’t going anywhere, anyway.