Verizon Communications Inc. (VZ, Financial) looks focused to dominate the U.S. wireless industry. In addition to investing a huge amount of money to improve its network infrastructure, the company has been trying to bring budget customers on board, a clear move to diversify revenue sources.
Verizon still stands out as the best U.S. wireless carrier, despite red-hot competition in the industry. The company retained its top ranking in 2014, in the categories of network reliability, speed, data and voice performance. Verizon only bulged in the texting category where archrival AT&T Inc. (T, Financial) took the lead, but SMS is not a key battle zone for wireless carriers.
The chart below shows the one-year stock price performance of Verizon against its peer AT&T.
Source: Verizon stock price by Amigobulls
In today’s world, wireless technology permeates almost every aspect of human life, from buying tickets on the phone to operating home appliances remotely. The rapid penetration of wireless technology is not only driving innovation of mobile devices but is also fueling demand for strong wireless networks.
Wireless is clearly the future of communication, and Verizon wants to own that future and play a key role in shaping it. That explains why the company has continued to rapidly expand and improve the quality of its wireless network.
The future of wireless business
Wireless technology has been described as the future and carriers that invest in superior wireless infrastructure should be able to own the future and enjoy a lucrative business. Verizon has been expanding its long term evolution (LTE) network and upgrading subscribers to gear up for the future growth. However, the primary question in investors’ mind is how the company will manage to grow in a market that is already looking crowded.
Verizon hinted at what it hopes to do in the future during the fourth quarter earnings call. The company’s CFO, Fran Shammo, said their focus is on the Internet of Things to drive explosive growth. According to Shammon, Verizon's Internet of Things business is now defined and generates revenue. The company tapped $585 million of revenue from the Internet of Things and telematics in FY 2014, representing a gain of 45% from the previous year. Verizon has a special focus on connected vehicles to grow Internet of Things revenue.
The company recently launched Verizon Vehicle, which is a new connected-vehicle solution that targets the auto aftermarket segment. New wireless car service looks to address a market of more than 200 million vehicles that currently lack a global positioning system (GPS) or connection to the Internet.
An estimated 50 billion devices are expected to be connected to the Internet through the Internet of Things in the next five years. Mobile devices will help in operating a large number of devices getting internet connection as Internet of Things spreads, presenting quality market for Verizon to address.
In addition to Internet of Things, mobile video is also another rapidly growing segment. Not only Verizon, but other big tech companies like Facebook and Google are also focusing a lot of their energies on mobile. In fact for companies like Facebook it is the mobile revenue that will drive future growth. Verizon is right in working hard to tap this area. As more and more people are turning to mobile devices to stream video and play games, users will be looking for strong networks to support these functions.
Changing strategy
As competition heats up in the wireless business, Verizon has been willing to make compromises to retain its existing subscribers and woo new ones, especially from rival networks. The company has climbed down from only targeting the premium end of the wireless market to offering budget prepaid plans.
Verizon is not new to prepay service, but its penetration in the segment was limited in scale. The company focused more on the upper tier of the prepaid mobile market, leaving budget customers to competitors. The company is now aggressively wooing budget prepaid subscribers with competitive voice, text and data plans.
Verizon recently boosted its prepaid voice and text unlimited plan for $45 per month to include 1GB of data, up from 500MB. It also encourages customers to sign up to auto top-up scheme and gifting them, with an extra 500MB on the $45 plan, for making the move.
The company is also encouraging its subscribers to increase their wireless data usage by streaming video and playing games, allowing it to generate more revenue from its existing user numbers. Unlike most of its competitors, Verizon has a wireless strong network that is able to support data guzzling mobile devices.
Highlight of connection growth
Verizon ended 2014, with 108.2 million of retail connections, having added nearly 2.1 million subscribers in the segment in the fourth quarter.
The lucrative postpaid connections were up 5.5% to 102.1 million.
Prepaid subscribers reached 6.1 million
The company has a huge opportunity, with more than 13 million still on 3G smartphone and another 18.5 million on feature phones in the postpaid base.
Subscriber upgrades enable Verizon to tap incremental revenue through increased data usage and lower costs in serving the upgraded subscribers.
Spectrum
Verizon is putting a lot of efforts in enhancing network quality and targeting customers, with high average revenue per account.
The company won $10.4 billion of wireless licenses in the latest major U.S. airwaves auction. Verizon said it would consider buying more airwaves in the secondary market if opportunities are available. Sprint Corp (S, Financial) has thought about selling its 2.5GHz spectrum, and Verizon will keep an eye on that.
Verizon would also look to the unlicensed spectrum to balk up its wireless airwaves needs. Still, the company intends on focusing on technologies that support efficient utilization of spectrum. These are efforts by the company to cut spectrum acquisition expenses amid high demand for airwaves, which has pushed up the costs.
Conclusion
While Verizon is plotting for wireless dominance, the company is not immune to the increasing competition from rivals. It recorded 1.14% churn rate in the fourth quarter, increase of 18 basis points from a year earlier. Retail churn rate also increased 12 basis points to 1.39% in the quarter. These developments call for Verizon to increase its competitiveness in all possible ways, especially on the pricing front to plunge loss of subscribers.
Given that wireless technology is finding application in new areas and with the demand for mobile data going up, Verizon is clearly justified in its focus on mobile business.
Note: Verizon is expected to report its quarterly earnings before the opening bell of April 21, 2015. Analysts expect the company to earn 95 cents a share.
