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Verizon Offers Upgrade on Installment

T S AAPL VZ

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Following AT&T, Inc. (T - Analyst Report), Verizon Communications Inc. (VZ - Analyst Report) is also bent on providing early upgrades to customers, however with a different strategy. The company is offering frequent upgrade of devices for customers willing to pay the purchase price in installments.

With no change in the company’s service pricing, we believe the new strategy would imply added expenditures for customers, while the company will gain from zero subsidies on phone upgrades by offering the part payment facility. The company is spending hugely to subsidize the handsets, which largely remains a drag on its profits.

The Street estimates that the new policy in phone upgrades will not have much of an impact as very few subscribers would go for early upgrades without any subsidies on devices. However, given the smartphone frenzy in the market, we believe customers will be carried away by the “in thing”, which makes premium handsets like Apple Inc. (AAPL - Analyst Report) iPhones a big hit of it times despite cheaper alternatives in the market.

Catching on this smartphone fever, we believe Verizon and its peers are likely to make up for the losses they bear on equipment subsidies initially by introducing new plans on selling devices. A few days ago, AT&T also announced of a similar move, which entailed early upgrades to smartphones and tablets every year without paying extra on down payment, activation fee, upgrade or financing fee.

While AT&T and Verizon are focusing on smartphone upgrades, another major wireless provider Sprint Corporation (S - Analyst Report) announced the launch of unlimited plans for voice, text and data services. The service, known as Sprint Unlimited Guarantee, would offer unlimited data for $30 a month on smartphones and $10 per month on other phones.

We believe the upcoming plans and policies to attract more customers will ultimately generate meaningful gains for these carriers. Coming back to Verizon, the company in posted a substantial year-over-year gain in earnings. Further, revenues were also higher thanks to the success of the strategies it has adopted to date. Its investments for enhancing wireless operations, expanding global networks, improving FiOS services and tapping growth opportunities in broadband, video and cloud activities also bode well for its profitability and we expect the new initiative of phone upgrade to also reap benefits for the company.

Verizon currently has a Zacks Rank #3 (Hold).

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