Verizon Communications, Inc. (NYSE:VZ) is facing severe wireless competition, especially from T-Mobile US Inc (NYSE:TMUS). But, the wireless carrier's strategy of keeping its cool and focusing on network quality has shielded it from competitors.
The US wireless market has always been competitive, and what Verizon is seeing now isn't new. While they acknowledge that T-Mobile has gained traction, management reminded investors that this is not the first time that Verizon has faced a new and emerging competitive threat.
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For example, in the 1990s the PCS (1900 MHz) spectrum auctions created a large number of new entrants (including T-Mobile and Sprint) that were viewed as material threats to incumbent 'cellular' operators such as Verizon.
Later, the industry saw the emergence of prepaid carriers like MetroPCS and Leap Wireless. This isn't even the first time that Verizon has seen competitors offer to buy-out customers' early termination fees (ETFs).
Deutsche Bank analyst Brett Feldman said Verizon retained a leadership position by being rational and measured in how it reacted, and management does not view the current environment as warranting a different approach. So far, management believes its 'keep calm and carry on' strategy is working.
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Despite three strong quarters of post-paid subscriber growth at T-Mobile, Verizon has put up good results itself including a modest improvement in post-paid churn in the fourth quarter. Verizon also added 1.6 million subscribers in the quarter.
Meanwhile, the key reason that most customers choose and stay with Verizon is network quality. While Verizon had some bad press in the fourth quarter related to network issues in a few large markets, such as New York, the company believes that these isolated hot spots have been fixed and that the carrier retains a meaningful network advantage.
To drive this point home with consumers it has resumed an ad strategy that focuses on its network coverage and speeds. A key example is its recent LTE map ads which compare Verizon's LTE coverage with its competitors.
Feldman noted that the goal is to cut through the various claims about who has the best coverage by simply showing consumers a map highlighting that Verizon has nearly 3 times the LTE coverage of its closest competitor AT&T.
To date, T-Mobile's Un-carrier offers have only appealed to a small portion of Verizon's post-paid base (mostly young, price sensitive individuals). So, the best way for Verizon to address isolated pressures is with targeted promos.
A key example is the recent launch of a $60/month plan that includes unlimited voice and messaging plus 250 MB of data. Management views this plan as both a lure that can attract new customers (who are likely to buy-up to larger data buckets down the road) and a retention tool for existing customers with limited data needs that may consider switching.
Feldman said another weapon is Edge, which is Verizon's version of a handset installation plan. Initial traction here has been strong with 20% of eligible gross adds selecting an Edge plan in the fourth quarter. However, the financial impact to date remains modest with Edge driving only 1 percent of Verizon's wireless EBITDA last quarter.
The analyst adds that it is too early to know whether T-Mobile's ETF buy-out offer will have a material impact on Verizon. Management's initial view is that the offer is not as attractive as it initially looks, with most customers receiving far less value than the headline claim of $650 per line.
Verizon believes that the T-Mobile offer has some logistical hurdles such as the need for families to replace all of their devices, and long delays in receiving a check for the value of the ETF. But, the company is watching to see what happens and will make adjustments if necessary.
Verizon is investing in converged services in order to remain differentiated over the longer term. The carrier is not quite at the point where converged services are at the core of its wireless product offering. But, it is increasingly in a position to leverage investments it has made in its other segments to add differentiated twists to its current plans.
Content will be a key part of Verizon's converged services strategy. Verizon says that it has agreed to purchase intellectual property rights and other assets that enable Intel's OnCue Cloud TV platform. These assets primarily provide the user interface for IP video services that Verizon can offer across both its wireless and wireline networks.
Feldman said several of Verizon's recent acquisitions and investments support a strategy of building-out new content capabilities and services. A potential example is integrating some the security capabilities housed in its enterprise segment into its wireless services.
Verizon would launch differentiated services like this in the near-term. So, Verizon can sustain solid growth in 2014 even as the competitive landscape shifts.
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