Here's Why Verizon Dropped Contracts for Customers

NEWS ANALYSIS: After resisting contract-cutting moves by competitors like T-Mobile for some time, Verizon finally succumbs and drops contracts.

Verizon drops contracts

Starting Aug. 13, when Verizon Wireless begins offering its new no-contract cellular data and phone packages to new and existing customers, the company will essentially be hoisting a white flag and giving up on the contract wars.

For Verizon, this is a huge concession. Firm in its belief for years that contracts are king, the company pushed back against rivals like T-Mobile that were tearing up customer contracts and letting their customers choose their services and their carrier relationships without limitations.

But on Aug. 7, Verizon announced it would resist no more. In a brief announcement, the company said that it will rid its customer relationships of contracts starting on Aug. 13, when users can begin to choose from no-contract services that will more closely match their wireless needs and lifestyles.

"T-Mobile has been carving an impressive swath in both AT&T and Verizon of late, and this is apparently their response," Rob Enderle, principal of the Enderle Group, told eWEEK in an email reply. "Typically you look at a market like this and figure the big guys will drive the change. In this case it is T-Mobile and it is clear that if the big guys don't change that T-Mobile may be the new big guy and Verizon and AT&T will be crying about what they once had."

What likely drove Verizon to make the move to ditch contracts, wrote Enderle, is that "T-Mobile has been taking an impressive amount of business from them" by being aggressive, but the number of customers moving to T-Mobile still hasn't been as high as it could be, he explained. "But these things tend to snowball and Verizon needed a better defense before this got a lot worse."

Another huge worry for Verizon, said Enderle, are the recent reports that Apple is looking at offering its own mobile services as a Mobile Virtual Network Operator (MVNO), where it would resell cellular services it would buy from the major carriers. "A big concern for Verizon is the rumor that Apple may enter this space and Apple customers are really, really, loyal to Apple."

Under its new contract-free mobile plans, Verizon said it will offer monthly packages that customers can customize, starting at $20 per smartphone per month plus a choice of four data packages ranging from $30 a month for 1GB of shareable data to $80 a month for 12GB of shareable data. A 3GB shareable data package is $45 a month, while a 6GB package is $60 a month. Unlimited talk and text are included with all of the packages and extra data can be purchased at $15 per GB. Monthly access charges for a tablet or Verizon Jetpack hotspot will be $10 per month.

Verizon will, at least for now, still offer two-year contracts for tablets and for existing customers who are on More Everything plans and want to keep them, a Verizon spokesman told eWEEK.

Gartner analyst Tuong Huy Nguyen said that Verizon's move "certainly feels like the direction that the [major] companies are moving in."

What's still not known, however, is how Verizon's decision will affect all of its customers, he said. "My guess is that no, it's not cheaper, and that it's making [prices] the same or even slightly higher."

Ultimately, it means that consumers who are long accustomed to subsidized smartphone prices are going to see much higher initial price tags for their new devices and that they'll be somewhat surprised to see "that the training wheels have come off , he said.