Doing the Math: Verizon Edge (September 2013)

In the last several months, many of the major US wireless carriers have introduced a different payment model for their devices in which they offer new smartphones for no money down. There has been some confusion regarding how this new payment model works and whether it is worth adopting. This post is my attempt to make sense of of your options if you're with Verizon and curious about their Edge program.

In the early days of wireless service in the US, consumers paid relatively small or zero up-front costs for their phones in exchange for a service contract (normally 24 months). In effect, the carrier subsidized consumers' up-front purchases and factored that cost into their monthly service plans: over 24 months, the carrier made enough profit from a customer's service plan charges to offset the loss of the initial phone purchase. As basic phones became cheaper and cheaper to manufacture, consumers who continued using them were (and are) able to continue to enter into 24-month contracts with the expectation of paying no money up front for their phones since the retail cost is of the devices is probably only $150-250, with the actual cost to the carrier being lower; that amount is easily recouped by service plan profits over the life of the contract.

However, as smartphones became more prevalent in the wireless marketplace, it became harder and harder for carriers to accumulate what they considered adequate profit from a heavily subsidized smartphone purchase. The retail, non-contract price for some of these smartphones is nearly $800, which requires carriers to raise service plan prices or cut their costs. As anyone who has paid attention to wireless plans in the last few years can tell, most carriers have chosen to raise additional revenue, mostly by changing their data options. Whether instituting hard data caps or limiting speed after a certain amount of data usage per month, these moves are all ways to make more money from users who utilize large amounts of data, either by charging higher plan prices or overage fees. Even with these changes, smartphone users can still expect to pay up to $300 for a newly-released device up front.

Under the Verizon Edge program, the advertised promise is that you don't pay anything for your phone up front. Instead, you make monthly payments toward it in addition to your wireless service plan charges. You are effectively taking out a small, interest-free, short-term loan from Verizon for the full retail cost of your phone and paying it back in monthly installments. This allows consumers to get a new device and pay over time as opposed to having to come up with a significant portion of the cost of the phone at purchase. In addition, under the Edge program, Verizon says you can upgrade as often as every six months.

So at first glance, this seems to be a pretty decent deal: no money down, pay a little more on your bill each month, and get a new phone every six months. Your reaction should be "OK, what's the catch?"


Upgrade Timing

It should be stated up front that you must be eligible for a device upgrade to start taking advantage of Verizon Edge. If you purchased a phone and signed a 24-month contract six months ago, you won't be able to start an Edge plan until your next upgrade comes up. You also might need a credit check: the requirement for one is based on your billing history. If you have had six consecutive months of good payment, you will not need one, but if you are a new customer or have had any payment issues in the previous six months, an "internal e-credit check" is required, whatever that is.

Assuming you are eligible for Edge, you can go in and pick out a phone with no money down. Well, you'll technically have to pay your first month's installment at the time of purchase. Afterward, you can upgrade after all three of the following requirements are met:

• You have had your Edge phone for at least six months.
• You have paid off at least 50% of the full retail value of your Edge phone.
• You return the Edge phone in appropriate condition as determined by Verizon.

So how long does it take to pay off half the retail value of a phone? Here's a few common examples:

• Apple iPhone 5: 12 months
• Retail price: $549.99 
• Monthly payment: $23.06
• Remaining balance after 12 months: $273.27
• Samsung Galaxy S4: 12 months
• Retail price: $599.99
• Monthly payment: $25.22
• Remaining balance after 12 months: $297.35
• Motorola Droid MAXX/Apple iPhone 5s: 12 months
• Retail price: $649.99
• Monthly payment: $27.15
• Remaining balance after 12 months: $324.19
• Nokia Lumina 928: 12 months
• Retail price: $499.99
• Monthly payment: $20.90
• Remaining balance after 12 months: $249.19

You can see that if you follow their payment plan, you would only be eligible for an upgrade once a year or so. That's still a significant improvement over the standard 21- to 24-month upgrade cycles that are prevalent today, but it's far from the six months that is being heavily advertised by Verizon to sell Edge.

"Sure," you think, "that's if I only make the minimum payment each month. If I add a few bucks to my payment on every bill, I'll be a lot closer to an upgrade after six months." Yes, accelerated principal paydown is normally an option in situations like this, but unfortunately, Verizon doesn't allow that. From their Edge FAQ:

Can I pay more than my scheduled monthly Verizon Edge installment?

No, unless you are either seeking to Edge Up to a new device, which requires that you pay at least 50% of the device following the initial six months of the Verizon Edge Agreement, or you are seeking to pay off 100% of your Verizon Edge installment agreement, which you may do at any time.

In plan English: you can't pay more than the billed amount on a monthly basis. You can only pay more than the billed amount in two scenarios:

1. You are paying down just enough (50% of retail price) to make yourself eligible for an upgrade. For the phones listed above at the six-month mark, that would currently be $136, $149, $162, and $125, respectively.
2. You are paying off 100% of the remaining balance for some reason, most likely because you want to cancel service.

The takeaway: unless you're willing to pony up over $120 out of pocket every six months, your minimum time between upgrades is probably going to be closer to a year than the widely-advertised six months.

Overall Cost

One of the main features of the Verizon Edge program is the ability to spread out the cost of a new device over time. But does it end up costing you more during that time? There are far too many scenarios for me to cover them all in this post, but I'll present a few of what I think are the most common ones so you can compare the two-year costs of each. The assumptions are that you are an existing Verizon customer with clean payment history on a Share Everything plan who is eligible for device upgrade on all lines and will keep your devices for the full two-year term (or, if you're on the Edge program, you trade in your phone for one with the same monthly payment). Taxes vary with locale, so we'll just be dealing with base service plan prices.

Individual Plan

• 1 smartphone (iPhone 5s)
• 2GB of data

Traditional

• Initial cost: $229.99 
• iPhone 5s: $199.99
• Upgrade fee: $30
• Monthly cost: $100 
• 1x smartphone line fee: $40
• 2GB data: $60
• 24-month cost: $2,629.99

Edge

• Initial cost: $0
• Monthly cost: $127.15 
• 1x smartphone line fee: $40
• 2GB data: $60
• iPhone 5s Edge fee: $27.15
• 24-month cost: $3,051.60

Under this scenario, you end up paying $421.61 more over two years if you choose the Edge program (again, this does not factor in taxes, mandatory fees, or optional features). With the same assumptions and plan, you would pay $375.29 more with the Galaxy S4, $321.61 more with the Droid MAXX, and $371.61 more with the Lumia 928.

Couples plan

• 2 smartphones (iPhone 5, Droid MAXX)
• 4GB of data

Traditional

• Initial cost: $459.98
• iPhone 5: $99.99
• Droid MAXX: $299.99
• 2x upgrade fee: $60
• Monthly cost: $150
• 2x smartphone line fee: $80
• 4GB data: $70
• 24-month cost: $4,059.98

Edge

• Initial cost: $0
• Monthly cost: $200.21
• 2x smartphone line fee: $80
• 4GB data: $70
• iPhone 5 Edge fee: $23.06
• Droid MAXX Edge fee: $27.15
• 24-month cost: $4,805.04

As you would expect, when we add another phone, the difference increases: in this situation, choosing the Edge program would cost you $745.06 more over two years. Also: $4,000 over two years for mobile phone service for two people seems high to me.

Family Plan

• 4 smartphones (2x iPhone 5, Galaxy S4, Lumia 928)
• 6GB of data

Traditional

• Initial cost: $619.96
• 2x iPhone 5: $199.98
• Galaxy S4: $199.99
• Lumia 928: $99.99
• 3x upgrades: $90
• Monthly cost: $200
• 4x smartphones at $40 apiece = $160
• 6GB data: $80
• 24-month cost: $6,379.96

Edge

• Initial cost: $0
• Monthly cost: $332.24
• 4x smartphones at $40 apiece = $160
• 6GB data: $80
• Edge fee for 2x iPhone 5: $46.12
• Edge fee for Galaxy S4: 25.22
• Edge fee for Lumia 928: $20.90
• 24-month cost: $$7,973.76

As we add more phones, the difference becomes even more striking: after two years, there is a $1,593.80 difference between the two programs. The reason is easy to see: even though you have to front nearly $620 to start the traditional plan, the bill is for the Edge program is over $130 more per month.

Conclusions

So is the Edge plan a good choice? As my operations management professor nearly always said: it depends. 

If you're purely interested in saving money or fine waiting two years between upgrades, you should run away from Verizon Edge and never look back. No matter which way you slice it, the large subsidy you receive when you purchase your phone up front and the lower monthly payment of the traditional program make the total cost significantly lower in any model I've taken out more than twelve months.

If you don't mind spending more to have a consistent monthly payment and hate having to come up with the amount of cash it takes to purchase a subsidized phone every two years, you should run the numbers yourself and decide whether that additional cost is worth the shorter upgrade cycle and convenience of a stable bill.

If you absolutely must have the newest device, this might be worth it for you, especially if you've found yourself selling your phone during your contract and purchasing a newer one for something close to full retail price. You should be able to get a new device every year or so if you only make the minimum Edge payment, and you have the option of paying down to 50% of value ($125-165) to get that advertised six-month upgrade cycle.

This program is obviously meant to entice consumers who have a problem (financially or preferencially) with paying larger one-time amounts at upgrade time or who are willing to pay more to upgrade more often. My concern is if enough people jump on board, it might become the new standard way of doing business. If that happens, what will be the incentive for wireless carriers to offer discounted devices during Black Friday and other retail holidays? In the past few years, smartphones have been one of the primary items used as loss leaders to get people in the door, and patient consumers can usually find deals on devices during the rest of the year as well (I got my current phone during a sale at Best Buy when it was $100 less than Verizon and other stores). However, if a significant number of consumers start using programs like Verizon Edge, the traditional model of phone subsidization might start fading away since the carriers make significantly less money using it. 

As you can probably guess, I won't be moving to Verizon Edge. For me, the extra money paid simply isn't worth the benefits gained since I'm happy upgrading every two years. The carriers are already using their high monthly service plan fees to recoup the cost of my phone; if I added something like Edge and take it to the full two year term, I'd be effectively paying for the phone twice. I think they're getting enough of my money as it is. But for the gadget addicts who simply must have the latest and greatest, this is definitely an option to consider.