Verizon Wireless will force customers off of their grandfathered unlimited data plans when they reach the end of their current two-year service contracts, according to the company’s chief financial officer.

It is all part of the cell phone company’s strategy to boost the average bills of customers with new, more expensive tiered family-shared data plans. With a significant number of current customers grandfathered on unlimited data plans that users likely will not forfeit voluntarily, Verizon will force the issue as customers come up for contract renewal.

The plan received considerable approval at today’s JPMorgan Chase TMT conference, a gathering for Wall Street investors and tech companies like Verizon.  Executive vice-president and chief financial officer Fran Shammo laid out the plan to switch customers to forthcoming family “data share” plans that are priced based on anticipated usage:

As you come through an upgrade cycle and you upgrade in the future, you will have to go onto the data share plan. And moving away from, if you will, the unlimited world and moving everybody into a tiered structure data share-type plan.

So when you think about our 3G base, a lot of our 3G base is unlimited. As they start to migrate into 4G, they will have to come off of unlimited and go into the data share plan. And that is beneficial for us for many reasons, obviously. So as you pick what tier you want to be and we think that there will be some price up in those tiers.

“Price up” is code language for bill hiking. Customers adopting family share plans may be able to share data across a larger number of devices, but at consumption pricing, many customers will find their Verizon bills substantially higher than before.

Shammo

“And the important part of that is we want the connections to come in and the way we have designed our plan, this plan is built on tiers and as we look at the future growth of LTE consumption because of the speeds and video consumption and consumption of other M2M-type devices, it is going to be more important that people will start to upgrade in their tiers as they start to really realize the benefits of the LTE network,” Shammo said. “As [customers] add more devices, they are going to have to buy up into tiers. So again, you will see the revenue increase there.”

Those revenue predictions were not sufficient to satiate Phil Cusick, an analyst at JPMorgan Chase. He questioned Shammo about the prospects for Verizon further increasing revenue with across-the-board rate increases on service plans.

Shammo would not commit to that, but was pleased with the lack of customer protests over their recent introduction of a $30 equipment upgrade fee. He called the new fee “the right thing to do.” More fees and surcharges are likely, according to Shammo.

“I think implementing these additional fees is probably where we are at,” he said. “With the construct that we have dealt with around data share and where we see consumption of LTE going, when you put the combination of them together, we are fairly confident that we will see people start to uptake in the tiers, which is really where we will get the revenue accretion in the future.”

Shammo also said Verizon’s fiber to the home network FiOS has gotten such rave reviews, it almost sells itself. That means the company will pull back on promotional offers and plans a general rate increase for all customers in the coming months, if only to bolster company profits.

“We have to do a better job in discipline of price increases and I think that you’ll see us do some price increases here over the next two quarters to offset the content increase and that will also contribute more profitability to the bottom line,” Shammo said. “You are going to have to concentrate more on reducing the amount of promotions, reducing the amount of retention that you put on the table to retain a customer and then also you are seeing that the industry is pricing up.”

Verizon FiOS customers will find rate increases applying both to equipment rental and service pricing nationwide, according to Shammo.

“We were actually below-market compared to our competitors on the amount of fee that we charge on the rental of a set-top box or a digital converter box,” Shammo explained. “We are switching around our bundles and the customers that are coming out of the current bundles will be priced up to the newer bundles. So you are going to see really a shift over the next two to three quarters in price-ups coming out of FiOS.”

As far as FiOS expansion goes, the company does not expect any major expansion in the service for the next several years.

“If we can penetrate the market and really turn the wireline profitability, could we potentially build out to other areas? Yes, but that is a decision that will be made in years out, not right now,” Shammo said. “So from a capital perspective, we are being very disciplined with where we are going to put that capital.”

Your contract with Sprint ends in June, but why wait, beckons the cell phone company, when you can upgrade your phone today (with a new two-year service agreement).

Two years earlier, providers wheeled and dealed upgrade-reluctant customers, particularly those considering their first smartphone, thanks to the bill shock that results when customers see a $30 mandatory data plan added to their monthly bill.  Sprint went one step further, handing 4G-capable customers Clearwire WiMAX — a technology even Russian cell phone companies can’t wait to abandon — and added a $10 premium data surcharge for the privilege.

In Sprint’s favor: their willingness to deal discounts on phone upgrades and their truly unlimited data plans. But while Sprint continues to bank on unlimited data, the bill on cheap phone upgrades may now be coming due.

The American wireless industry is increasingly taking a page from the airlines, adopting irritating fees and surcharges while curtailing the perks and rewards that used to come with customer loyalty and family plans that routinely run into the hundreds of dollars.

Equipment Upgrade Fees

Sprint, Verizon, AT&T, and T-Mobile all have a nasty surprise in store for customers who have not upgraded their smartphones in the last year or so: the equipment upgrade fee.  Sprint and AT&T both charge $36 per phone, Verizon Wireless now charges $30, T-Mobile $18.

Verizon customers are especially peeved because that wireless company used to reward loyal customers with a $50 credit off any new phone at contract renewal time. Today, instead of getting “New Every Two” discounts, Big Red will charge you $30 for every new phone when you renew your contract.

Verizon’s excuse is that the new fee will be used to offer customer “wireless workshops” and “online educational tools,” according to Verizon spokeswoman Brenda Rayney. The company also claims the fees will cover more sophisticated consultations with “company experts” that are trained to provide advice and guidance on today’s sophisticated smartphones. In other words, these fees are supposed to compensate Verizon’s store and kiosk employees.

For people like my cousin, upgrading to a new Sprint phone at contract renewal time is an exercise in frustration. In addition to the $149-199 subsidized equipment price, Sprint now tacks on a $36 upgrade fee (per phone).  What miffs him is that Sprint is treating new customers better than existing ones, willing to waive one-time activation fees (coincidentally the same $36) for new customers, but steadfastly refusing to credit equipment upgrade fees for existing loyal customers.

Sprint will tell you they are not alone charging upgrade fees, and they would be right. All four major national carriers now charge the fees, effectively a penalty when customers decide to upgrade their phones.

Many also find it nearly impossible to get companies like Verizon Wireless to waive the fees, even when some of their best customers ask.

“Verizon Wireless was willing to throw away my 12 year account, earning them more than $500 a month in revenue, over the upgrade fee issue,” reports Stan Dershau. “Our contract expired this month and it was time for new phones, and Verizon absolutely insisted that we pay $150 in upgrade fees for new equipment on our account, even after the $600 they’ll collect from the smartphones we intended to buy.”

Dershau found absolutely nobody willing to relent on Verizon’s upgrade fees. Even supervisors told him the company has a no-waiver policy that is strictly enforced, and they could do little more than offer a token service credit even if Dershau threatened to take his business somewhere else.

“I haven’t decided what to do yet, but I canceled my upgrade plans for now,” he reports.

Dershau was always able to get Verizon to waive earlier fees because of the monthly business he brings them, but those days are over.

“It’s a whole different attitude with them now,” Dershau says. “They just want money.”

AT&T's fine print.

Ben Popken recently wrote about his efforts to avoid Verizon’s $30 upgrade fee, with mixed results.

Verizon’s suggested solution is to sell your old phones back to the company through their trade-in program, using the money to offset the equipment upgrade fee. But unless you own an iPhone, Verizon’s trade-in offers are strictly low-ball, often under $30 on non-Apple phones. That leaves you with a slightly lower upgrade fee and the loss of your old phone, which Verizon may recycle or resell refurbished to someone else.

Popken explains he found one convoluted way around Verizon’s fees:

First, start a new line of service with the new phone you want. Then, port your old phone number to a 3rd party service, like Google Voice (here’s a guide from Lifehacker on doing so). Lastly, cancel the line with the old phone and port the old phone number back onto the new phone, thus keeping the new phone, the old number, and dodging the fee. But there’s a catch. It only works if you wait three months to port the number back. If you do it before then, Verizon’s system treats it like you’re continuing the same service, and they hit you with the $30 upgrade fee. Curses.

Popken forgets, however, that Google itself charges a $20 fee to port cell phone numbers to Google Voice, eliminating 2/3rds of your potential savings.

In fact, outside of purchasing a phone at the full, unsubsidized price from a third party, Verizon’s $30 fee will be visiting your phone bill sooner or later, if you decide to upgrade.

The Phone Subsidy: Slaying North America’s Sacred Cow Wireless Business Model

Consumers who crave the newest smartphones should thank their lucky stars they live in Canada or the United States, where the wireless industry heavily discounts the upfront cost of the phone when customers sign a service contract. But phone companies like AT&T and Verizon are not giving you a gift. In return for fronting a discount of as much as $400, companies set their monthly rates higher to recoup that subsidy over the life of your two-year contract.

That worked fine when cell phone companies only paid a few hundred dollars for basic phones. But today’s most popular smartphones can cost companies $400 each, and that upfront revenue hit has annoyed Wall Street for years. Even worse, while providers hand you a discounted phone, they’ve already paid the asking price to companies like Apple and Samsung, who book that revenue immediately and never have to worry about a customer skipping out on their contract.

Wall Street has been putting pressure on companies to do something about the expensive phone subsidies, and companies are responding. The equipment upgrade fee, increased activation fees, and rising monthly service charges are all a part of a greater plan to discourage customers from upgrading their phones and increase profits.

Wall Street analysts love every part of it, especially if companies can do away with equipment subsidies -and- maintain today’s pricing:

“Optimism has increased that we are witnessing the leading edge of a more disciplined, and more profitable, future,” Craig Moffett, a telecom analyst at Bernstein Research, wrote in a recent research note. The question now, he wrote, is how much carriers can increase their profits thanks to “increased discipline and pricing power.”

The answer could be quite a lot. A marketplace experiment in Spain is being closely watched by wireless phone companies worldwide and could be coming to Canada and the United States before your next two-year contract is up for renewal.

In March, Telefónica SA, Spain’s largest cell phone company, stopped subsidizing smartphones for new customers. Vodafone, which co-owns Verizon Wireless, quickly followed.

As a result, Spanish customers looking for an iPhone will now pay $800 to purchase the phone at full price, or they can sign up for an “installment plan” that will add $45 a month to their cell phone bill for the next 18 months. Both companies say the new policy won’t apply to existing customers, in an effort to discourage them from switching companies.

Telefónica anticipates the changes will slash as least 25% off of their spending. Instead of fronting subsidies to attract new customers, the phone company will increase subsidies for existing customers who agree to stay. Unfortunately for Telefónica, early results are not promising. More than 500,000 customers left the same month the new policy was announced.

A handful of smaller Spanish players see the move by both major companies as a competitive opportunity to win over new customers. Orange, for example, has not stopped offering subsidies and as a result Telefónica has lost potential new customers who signed with Orange instead. The “churn rate” of customers coming and going remains a concern for company executives. But so far, Telefónica considers getting rid of phone subsidies more important than the customers they have forfeit over the new policy.

“We are pretty firm on our strategy of trying to change the paradigm of the sector, […] devoting the bulk of our efforts to our existing customers and, therefore, trying to move away from incentivizing churn of our customers either from us or from the others,” said company CEO Cesareo Alierta Izuel. “We are very firm on this new handset strategy. We need to fight to see if the trend is going to the right direction. And again, we think it is.”

The Wall Street Journal reports Telefónica’s bold plan has caught the attention of Verizon CEO Lowell McAdam, who sees it as a potential profit booster, and McAdam expects Verizon may cautiously follow the Spanish company’s lead.

“We’ll probably offer some things like that, and then we’ll see what the adoption is like,” McAdam said. “You can’t push this on customers before customers are ready for it.”

For now, some customers are not even ready for equipment upgrade fees. My cousin’s upgrade plans remain on hold for now, as are those of the Dershau family.

“I am not going to be browbeaten into paying these unjustified fees,” Dershau said. “Where does it stop?”

[flv width=”512″ height=”308″]http://www.phillipdampier.com/video/WSJ Dodging Verizon’s New 30 Upgrade Fee 5-9-12.flv[/flv]

Ben Popken talks about trying to avoid Verizon’s $30 equipment upgrade fee.  (3 minutes)

[flv width=”480″ height=”380″]http://www.phillipdampier.com/video/WCPO Cincinnati Thousands receiving fake Verizon bill 5-11-12.mp4[/flv]

Thousands of Verizon Wireless customers are getting phony e-Bills that claim to be from the wireless phone company, but in fact come from one of the most sophisticated phishing scams seen yet. The Better Business Bureau reports scores of complaints from across the country, with bills looking nearly identical to e-mails sent directly from Verizon Wireless.  Only the amounts have been changed — boosted in some cases to more than $1,200.  Unwitting customers who click on the e-mail link are invited to make payment arrangements with any major credit card, which ends up in the hands of the scammer. WCPO in Cincinnati reports this scam almost fooled some Verizon Wireless customers. If the scammer was a little less greedy, it might have worked. (2 minutes)

After intense lobbying, wireless phone companies won a significant reprieve from the watered-down 2010 Net Neutrality policies introduced by Federal Communications Commission chairman Julius Genachowski.

Now some of America’s largest cell phone companies are considering plans that would offer special “toll-free” access to favored partners’ content, while leaving everyone else subject to the companies’ usage capped data plans.

Much of the discussion about exempting certain content from data allowances is taking place at this week’s CTIA Wireless trade show in New Orleans.

Some highlights:

• T-Mobile USA is planning to expand video streaming services offered to subscribers, but with a twist. Content creators could pay to have their shows streamed to customers, and in turn, T-Mobile would not charge that traffic against the customer’s monthly usage allowance. Whether T-Mobile would maintain an ownership interest in the content is unknown, but “preferred partners” would receive exceptional visibility through aggressive promotional campaigns T-Mobile would launch.  So would T-Mobile, which plans advertising and promotional messages inside that content;
• Verizon Wireless said it was looking to create “toll-free” data services that would be subsidized by content providers. Video, games, and even apps could be promoted to consumers as “data usage”-free, meaning it won’t count against your monthly usage allowance. But Verizon recognizes the concept would be controversial and run afoul of Net Neutrality concerns.
• AT&T has already signaled its interest in creating a “content-provider-pays” model where users get free access to content if content providers pay AT&T’s traffic charges.

All three carriers earlier abandoned all-you-can-eat flat rate data plans, and Net Neutrality proponents claim these latest moves are attempts by wireless phone companies to further monetize data traffic.

The Wall Street Journal reports the plans, in some cases, fly in the face of rhetoric about spectrum shortages and a wireless data traffic crisis (underlining ours):

T-Mobile’s Mr. Duea said the goal of new video offerings that don’t count against data plans would be to get customers interested in consuming more data, and set T-Mobile’s plans apart from those of other carriers.

"Data floods" and "spectrum shortages" don't stop T-Mobile.

Current FCC Net Neutrality rules require wireless carriers to not block competing services from companies like Skype and Google, nor censor content. Both Verizon and MetroPCS are challenging those rules in federal court. But wireless carriers are already exempt from giving preferential treatment to certain types of data or traffic, which opens the door to “toll-free” data services.

Net Neutrality supporters believe these practices will uneven the playing field for content creators and innovative new online start-ups, who may not be able to afford the prices carriers charge for first class treatment. It also influences consumer decision-making by encouraging customers to use the “toll-free” services to preserve their monthly data allowance.

Companies like Ericsson and Cisco have plans to market technology that will allow carriers to divide up data traffic into different traffic lanes, some fast and free to use, others subject to a customer’s monthly data allowance, and certain undesirable traffic shunted to low priority slow lanes.

A Verizon Wireless executive ironically blamed the need for “toll-free” pricing partly on the wireless industry itself, which has almost universally abandoned unlimited data plans.

“As we move away from flat rate pricing, there is room for an 1-800-type of service where certain destinations could offset the cost of the network to get customers to those destinations,” said Verizon’s chief technology officer Tony Melone. “There are Net Neutrality issues that have to be addressed, too.”

Melone added the company wasn’t quite ready to launch the “toll-free” traffic lanes just yet, but claimed certain content providers were discussing deals with the company to participate if and when the new toll booths are opened for traffic.

Phillip "An Ex-Frontier Customer" Dampier

The other week while sitting in the dentist’s office waiting for my wallet to be drilled, I overheard a conversation at the reception desk over the latest effort by Frontier Communications to shoot itself in the proverbial foot.

“I decided to get rid of my phone line the other day and when I called Frontier to disconnect, I was told I would owe them more than $150 in disconnection fees for a contract I never knew I had with them,” opened the conversation.

“That happened to my sister as well, and she couldn’t believe it because nobody ever told her she was on a contract,” came the reply.

“I never knew I was either, and I told the representative they needed to show me where I signed up for anything like that or else I’m not paying it,” insisted the latest victim of Frontier’s phantom service contracts.

Within a minute or two, all had decided they were done doing business with the phone company that got its start more than 100 years ago as the well-regarded Rochester Telephone Corporation.  In 2012, there was no turning back after $150 “disconnect” penalties and other insults.  They were intent on being rid of Frontier once and for all.

With customer unfriendly policies like that, it comes as no surprise Frontier has been losing customers in the Rochester market for years, mostly to cell phone providers or Time Warner Cable — the latter which delivers more value and far superior broadband speed in western New York communities not served by Verizon FiOS.

Surprise... you're on a contract with a $150 cancellation penalty.

Twenty years ago, Rochester Telephone delivered excellent value, charging about half what then-NYNEX customers in Buffalo and Syracuse paid for telephone service. But as Frontier has increasingly disengaged from being an aggressive contender for telecommunications services in Rochester, people in this region of one million noticed, especially when Verizon’s fiber to the home service arrived in Buffalo, Syracuse, Albany, and beyond.

What did Frontier offer? Not much. Frontier’s local general manager Ann Burr, who used to be in charge at Time Warner Cable locally, told local media Rochester didn’t need faster broadband speeds. That’s a fitting argument for a company that doesn’t deliver them and believes 3Mbps broadband is plenty fast enough.  If you don’t like it, feel free to leave, so long as you aren’t trapped with that long-term service contract you never knew you had. (The New York Attorney General’s office has already spanked Frontier once for the practice, forcing them to issue refunds, and judging from last week’s conversation, it appears the problem has not abated.)

The fact is, Frontier offers little compelling to the landline customers they have left.

Rochester’s experience with Frontier seems apropos when contemplating the phone company’s latest quarterly results, which one analyst called “ugly.” Having listened to at least a dozen of Frontier’s quarterly conference calls with investors over the past three years, there seems to be no shortage of promises of better days to come.  Frontier is among the few companies I have heard call customer losses of 5-11% every quarter “an improvement.”

As one investor put it, the management at Frontier should win an Academy Award for feigned optimism.

This week, the company announced first-quarter earnings fell 51% thanks to lower revenue earned from the dwindling number of residential and business customers. But better days are ahead, really.

Road to nowhere?

Frontier has spent the last year treating their “system conversion” for ex-Verizon territories as the telecom equivalent of the Holy Grail.  Once achieved, the company can do anything. The reorganization underway internally at the company is supposed to improve its lackluster customer service, generate more marketing opportunities, save the company money, and open the door to a new chapter of a unified Frontier family, with ex-Verizon and always-Frontier employees coming together to do things “the Frontier way.”

How much longer investors will stick around waiting for the promised land remains an open question. The stock has already achieved a 52-week low, and if the company cuts its dividend — the primary point of attraction for investors — it will drop much lower.

Frontier’s management decisions have effectively left the company between a rock (Wall Street) and a hard place (its dwindling customers).  Much of the company’s success is predicated on rural broadband/landline service, where the company expects to face little competition.  But Verizon, the company that sold them much of their inherited network, has a little surprise for them.  After selling off the “junk” (a deteriorating copper landline network they no longer care much about), the company’s wireless division is coming back to town to poach Frontier’s customers.

Verizon’s grand plan is to pitch two products:

1. Home Phone Connect: Verizon’s landline replacement works with the customer’s home phones over Verizon Wireless’ network. Customers can share minutes on an existing Verizon Wireless plan for $9.99 a month or get unlimited calling for $19.99 a month. It comes with most popular calling features included.
2. Verizon HomeFusion Broadband: Verizon Wireless has excess capacity in rural areas, especially on 4G LTE-equipped towers, so why not put it to use? While commanding a premium at $60 a month for just 10GB of usage, customers who value speed over money may tolerate that diamond price.  If Verizon finds a way to relax that usage limit and lower prices, it could present a real competitive threat to phone companies delivering lower end DSL service.

[flv width=”480″ height=”290″]http://www.phillipdampier.com/video/Home Phone Connect – Home Phone Transfer Verizon Wireless.flv[/flv]

Verizon Wireless introduces Home Phone Connect, a product designed to tell landline companies like Frontier to take a hike.  (2 minutes)

While Verizon isn’t likely to immediately grab major market share with either product, it foreshadows an intent to leverage their rural wireless network to remain a player, even in places where they have abandoned selling landline service.

How to Stop the Erosion

Turning things around? Frontier contemplates licensing U-verse from AT&T

Even in a barely-competitive marketplace, companies must invest to keep up. But that investment annoys Wall Street, which can depress the stock (and the all-important dividend). But improved service retains customers (and may even win a few ex-customers back). So news that Frontier was considering licensing U-verse technology to upgrade their major markets is a logical first step to stop the bleeding. Frontier is irrelevant delivering broadband at speeds of 3Mbps at out the door prices that meet or exceed what the much-faster cable competition charges. U-verse would allow Frontier to deliver faster broadband (up to 24Mbps is plenty fast for a lot of consumers), build its own IPTV offering instead of relying on satellite dish reseller agreements, and maintain landline customers, assuming the company prices its bundle correctly.

While we are big proponents of fiber-to-the-home service, it is clear Frontier will never spend the money to deliver it, even to their largest service areas. They will prefer the cheaper route of fiber to the neighborhood, relying on existing copper infrastructure to connect individual homes to the service. It represents a reasonable first step.

Frontier also must continue aggressive investments in their broadband network in more rural areas. Some of the company’s regional backbones remain woefully congested, and the company just doesn’t deliver the speeds it markets on its website in too many areas.

High speed should really mean "high speed"

Jameson, a Stop the Cap! reader, is a good example. He signed up for “Frontier Max DSL” which claims it can deliver up to 6Mbps in his part of east-central Indiana.  He ended up with 1.6Mbps instead, in part of because Frontier’s records were inaccurate.

I called Frontier tech support after reading some stuff on Stop the Cap! and another site, learning that since I live under 5000 feet from the DSL termination point (the Frontier building down the road) that I shouldn’t have any problems getting their highest speeds. I got lucky and got a customer support agent who understood my problem, and a tech support guy who genuinely seemed concerned about my issue. The tech guy checked Frontier’s records and I was labeled as being 30,000 feet from the building, but I’m really only around 4200 feet away, and my speeds were provisioned at 1.6mbps down and around 450kbps up. He put in a support ticket to have my speeds automatically raised up to the max I’m paying for.

Jameson ended up with around 7Mbps — a little better than the advertised speed, but only because he thought to ask and reached the right people at Frontier to follow through.

Some of our readers in West Virginia are not so lucky, having the mediocre speeds they fought to receive reduced further when a technician suddenly remotely adjusts speed provisioning on customer equipment to reduce their maximum broadband speed.

Frontier’s DSL problems don’t just exist in rural areas. We experienced it first-hand in 2009 when the company advertised up to 10Mbps speeds in Rochester, and delivered 3.1Mbps to us instead.

Consumer Reports documents this is not an isolated problem, with only two-thirds of Frontier customers getting the broadband speeds they pay to receive. If and when a competitor does better, Frontier loses another customer.

Finally, Frontier must improve its customer service. The company is notorious for giving inconsistent answers to customer questions, doesn’t always follow through on commitments, and maintains far too many “gotcha” terms and conditions on contracts that leave customers exposed to unjustified early termination fees.

[flv width=”640″ height=”380″]http://www.phillipdampier.com/video/CNET Verizon HomeFusion Broadband May 2012.flv[/flv]

CNET shows off the equipment used with Verizon’s new HomeFusion wireless broadband service.  (2 minutes)