Verizon kills off service contracts, smartphone subsidies

Verizon is shaking up how you pay for your wireless service.

Verizon Wireless on Friday introduced a set of new data plans that require customers to pay for their smartphone in monthly installments or buy it outright. The new plans go into effect August 13.

It's a radical change in how Verizon operates and signals a broader shift away from smartphone subsidies and service contracts. Customers are increasingly paying for their devices in exchange for lower service fees -- a trend started by T-Mobile two years ago. The change has resulted in heightened awareness of their smartphone and service costs.

Under the revamped system, there are no single-line options or family plans. Verizon will focus its efforts promoting four choices with varying amounts of data. (They all come with unlimited voice and text messages.) The "small" bucket will offer 1 gigabyte of data for $30 a month, the "medium" will get 3GB of data for $45, "large" gets 6GB of data for $60 and "x-large" gets 12GB for $80. As with its previous plans, the data can be shared among devices and accounts.

As there are no contracts, customers can switch between plans each month.

Beyond the fee for the data, Verizon also charges an "access" fee to connect the device. It will cost $20 a month to connect a smartphone, $10 to connect a tablet or "Jetpack" portable Wi-Fi hotspot, and $5 for a connected device like a smartwatch.

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By eliminating the option of a contract, as well as focusing on four options, Verizon believes it is making things simpler for customers.

"There's a lot going on in the market," said Rob Miller, vice president of pricing and promotion. "We felt like this should not be a tough decision."

But the company's focus on just those four plans may turn off more heavy users.

"It's odd that Verizon's largest shared data plan would top out at 12 GB leaving potential high usage customers to wonder if they would get jammed with big overage charges if they switched to these," said Walt Piecyk, an analyst at BTIG Research.

Verizon will offer large data plans, but won't publicly promote them, Miller said. The company said it would offer them to customers in the store, but it's unclear whether they will be available online.

The move is a big shake-up for Verizon, which still has the most customers on a service contract out of the four national carriers. The contract was attractive to consumers because it offered a subsidy on the smartphone. Sign a contract, and you can buy an iPhone 6 for $200. Without that contract and subsidy, the smartphone would cost $650.

But the advent of monthly installment plans has meant the carriers have increasingly placed the burden of the device cost on the consumer. Verizon isn't the only one moving away from contracts. AT&T has asked its retail partners like Apple and Best Buy to only offer service plans with monthly installment plans for devices, moving away from contracts.

It's also not the only one trying to simplify things. Sprint attempted to give customers a clearer option with its "All-In" pricing plans, which cobble together the service and device cost under one price.

A slight discount

Prior to the change, Verizon offered 15 options for family data buckets -- as well as separate plans for individuals. Aside from the "small" bucket, which at $30 a month represents pricing continuity, each new plan will be offered at a slight discount from its earlier counterpart.

The 3GB plan costs $5 less and the 6GB plan costs $10 less. There is no current 12GB option, but $80 will only get you the 10GB right now.

Verizon is also simplifying the smartphone access cost. Previously, the access fee was $40 if you signed a contract, $25 if you had a plan that had 4GB of data or less, and $15 if you had a plan with 6GB of data or less. That gets streamlined into one $20 access fee.

Once the plans go into effect, customers on current More Everything plans can switch to the new options to take advantage of the additional data. But if a customer is on a contract, the person would have to continue paying $40 for the access fee until the contract is up. At that point, Verizon will automatically take them down to $20. Customers on More Everything can stick with their existing plans, as well as add lines. The company won't be forcing them off their plans.

The downside

The changes won't be universally embraced. Customers on family plans with 6GB of data would actually see a $5 increase in their device fee under the new options. That adds up if you have a large family with multiple lines.

Verizon also eliminated its low-end 500-megabyte plan, priced at $20, which was an attractive option for customers who weren't heavy data users but still wanted to be on its network -- typically older individuals who didn't need all the bells and whistles of the latest smartphone.

Verizon said it wanted to clear up the confusion between megabytes and gigabytes, sticking with one standard in its plans.

"We will watch it closely," Miller said. "If there's huge market demand, we'll change it."

The changes come as T-Mobile, in particular, has stepped up its own offerings, including a plan that gives each individual 10GB of data. Verizon, however, didn't feel the need to respond directly.

"We feel we're right where we need to be: giving you the best network in wireless," he said.

Updated at 11:19 a.m. PT: To include a comment from an analyst.