Verizon’s Smart Moves for a Data-Hungry Market

by Brad Moon | June 21, 2012 10:06 am

A maturing market is tough on companies, especially when they play in one that has seen strong growth in recent years. Verizon (NYSE:VZ[1]) finds itself in just such a position. Its primary lines of business are wireless, through a partnership with Vodafone (NASDAQ:VOD[2]), and residential TV, Internet and telephone service. All of these have been high-growth sectors, but with the exception of data demand, business is slowing.

Verizon has invested heavily in infrastructure. Over the past nine years, it has sunk $23 billion into its fiber optic network [3](FiOS)[4]. It has also invested heavily in LTE 4G network coverage, with a nation-leading 304 markets served by the next-generation, high-speed cellular network. By the end of the year, Verizon expects to have 400 markets covered. By comparison, rival AT&T (NYSE:T[5]) has LTE coverage in only 39 markets.

For years, wireless providers and Internet providers scrambled to offer discounted plans in order to sign up new customers as smartphones, tablets and streaming video gained traction in the marketplace. But at this point the market is mature.

Analysts have pointed out that 110% of Americans own cell phones[6]. If that sounds impossible, the trick is that people are now buying multiple mobile devices. The point, though, is that the days of 10% subscriber increases over a quarter are history. The existing customer base has largely been snatched up.

To make matters worse (at least on the mobile side), prepaid is becoming an increasingly popular option. Signing a customer to a monthly contract guarantees set revenues every month, typically for two to three years. Prepaid generates far less.

Ars Technica reports that nearly one-quarter of all mobile devices in the U.S. are now prepaid, and that in May, for the first time ever, the U.S. mobile industry had a net loss in the number of contract subscriptions[7], down 52,000.

Amid the slowing, the one thing that continues unabated is demand for data. AT&T claims data over its wireless network has grown 20,000% since 2007[8]  — the year the iPhone  was introduced. That’s not a typo. That’s exponential growth in demand, and it shows no sign of easing.

The problem is, providers had to pay to upgrade infrastructure to handle that demand while competing for lucrative contract subscribers by offering unlimited data plans. Not sustainable.

Verizon is the first of the major players to introduce new pricing models that reflect an attempt to continue delivering solid, rational revenue growth in a mature market.

The first step was in wireless. New pricing structures announced last week reflect the new reality of how people use mobile devices — primarily for data consumption, and increasingly, with multiple devices in a household.

The new “Share Everything[9]” plan kills off unlimited data[10], but it also removes penalties for sharing data access among multiple mobile devices. Users with multiple devices win in that they can easily connect all of their devices without penalty, but with unlimited data gone, their monthly outlay will rise with usage. For most users, this will be cheaper than signing up for separate data plans for each device (which they likely wouldn’t have done).

For Verizon, this offers the opportunity to make more revenue from data consumption as users bring those multiple devices online. At the same time, it’s a competitive edge that should help retain subscribers, make prepaid less attractive and possibly win a few customers from the other guys (at least until they come up with similar plans).

On the FiOs front, Verizon has boosted the speed of its home Internet service, along with prices (adding an estimated $10 to $15 to the average monthly bill). Reflecting higher consumption of streaming Internet video from the likes of Netflix (NASDAQ:NFLX[11]) and Amazon (NASDAQ:AMZN[12]), Verizon customers will now have a base network speed of 15 Mbps  — sufficient to download a two-hour HD movie in 44 minutes. According to The Wall Street Journal, this makes Verizon’s base speed equivalent to AT&T’s midrange[13].

Verizon is giving customers the option to pay extra to boost their speeds to as high as 300 Mbps, at which point that movie takes about two minutes to download. Comcast (NYSE:CMCSA[14]) maxes out at 105 Mbps in its home Internet plans.

From an investment point of view, Verizon appears to be doing all the right things. It spent on infrastructure in past years and now has the advantages of speed, capacity and coverage over many of its rivals. It’s been first out of the gate with new pricing plans that are rational and reflect the need to continue growing revenue in a mature market while offering carrots that data-hungry consumers are likely to respond to.

The only real downside is a holdup on its planned $3.6 billion wireless spectrum purchase[15], which is currently under review.

The stock is up 23% over the past year. Its P-E ratio is high at 47, but the stock is a relative bargain compared with AT&T’s at over 52. Investors seem happy with Verizon’s wireless arm and its new data-sharing plan, yet the stock has been down slightly since news of the FiOS rate changes hit — though at $43.40, the stock is only slightly off its five-year high of $45.60.

If consumers agree that faster data, more of it and the ability to share among their growing collection of connected devices is worth spending a little more, Verizon is in a good place.

Endnotes:
  1. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  2. VOD: http://studio-5.financialcontent.com/investplace/quote?Symbol=VOD
  3. $23 billion into its fiber optic network : http://online.wsj.com/article/SB10001424052702303703004577474491608119330.html?mod=googlenews_wsj
  4. (FiOS): http://online.wsj.com/article/SB10001424052702303703004577474491608119330.html?mod=googlenews_wsj
  5. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  6. 110% of Americans own cell phones: http://arstechnica.com/business/2012/06/prepaid-mobile-phone-users-in-america-hit-record-high/
  7. the U.S. mobile industry had a net loss in the number of contract subscriptions: http://arstechnica.com/business/2012/06/prepaid-mobile-phone-users-in-america-hit-record-high/
  8. data over its wireless network has grown 20,000% since 2007: http://www.attinnovationspace.com/innovation/story/a7781181
  9. Share Everything: http://investorplace.com/2012/06/verizon-wireless-kills-nearly-all-phone-only-plans-vz-t/
  10. ” plan kills off unlimited data: http://investorplace.com/2012/06/verizon-wireless-kills-nearly-all-phone-only-plans-vz-t/
  11. NFLX: http://studio-5.financialcontent.com/investplace/quote?Symbol=NFLX
  12. AMZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AMZN
  13. this makes Verizon’s base speed equivalent to AT&T’s midrange: http://online.wsj.com/article/SB10001424052702303703004577474491608119330.html?mod=googlenews_wsj
  14. CMCSA: http://studio-5.financialcontent.com/investplace/quote?Symbol=CMCSA
  15. holdup on its planned $3.6 billion wireless spectrum purchase: http://www.bloomberg.com/news/2012-04-26/two-house-democrats-seek-hearing-on-verizon-airwaves-purchase.html

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