After blowing away expectations with its second-quarter earnings report, Verizon (NYSE:VZ) showed the strength of its brand and network are still well intact. Given the option between unlimited plans from all four major carriers, customers increasingly chose Verizon's network. It managed to add over 600,000 postpaid customers and over 350,000 phone customers, specifically.
While not the most in the industry -- that title still belongs to T-Mobile (NASDAQ:TMUS) -- it's a big step up from last year and the previous quarter. And it points to both the success and the importance of Verizon's unlimited data plan, which it unveiled in February.
But Verizon is taking steps to moderate the amount of data on its network. It's launching a new, less expensive plan ($75 per month for a single line) that throttles video quality down to 480p. Subscribers that want high-definition video can opt for a more expensive plan ($85 per month), but even then, they're limited to 720p on phones and 1080p on tablets. This is just another sign that Verizon is having trouble keeping up with the data demands of its customers.
Signs of trouble
Verizon's new throttled video plans are an attempt to manage the amount of data clogging its pipes. It's not a unique strategy. In fact, when T-Mobile introduced unlimited video streaming for all of its customers a couple years ago, it relied on throttled video quality to do it. The move actually ended up saving the company bandwidth. Verizon is likely hoping for similar results.
Verizon's network speeds started suffering as soon as it started offering an unlimited data option, according to recent test results from Ookla. Verizon isn't alone. AT&T (NYSE:T) is also showing signs of a slowdown following the introduction of its unlimited plans.
Verizon's network strength is integral to its success. It's part of the company's ad campaigns and its branding. While it's constantly working to improve LTE capacity and speed, its attention is now split between it and 5G.
A response to the competition's price hike?
While Verizon is certainly looking to free up additional bandwidth on its network with the move to a tiered unlimited plan, it may also be an appropriate response to recent pricing moves from the competition. T-Mobile upped its One Plus plan by $5 to match Verizon's $80 per month price point. The new pricing puts a bit more distance between T-Mobile's and Verizon's, maintaining its pricing premium.
Meanwhile, AT&T's top-tier plan starts at $90 per month, still $5 more than the new $85 per month Verizon plan. That plan, however, also includes free HBO and a $25 discount on any AT&T television bundle. AT&T is offering a lot more value; Verizon is offering its network, which is still No. 1 for now.
But this could have further pressure on service revenue
Although Verizon is offering a pricier option, it's likely a lot of users will opt to switch to the less expensive unlimited plan. Current subscribers can opt to keep their current plan, but they'll still be subjected to the same throttling as the $85 per month plan. Only new subscribers who want high definition video will have to pay the higher price.
As a result, Verizon could face continued pressure on its service revenue per user. Management said it expects the metric to start recovering in the second half of the year, but this move could put a damper on that recovery.
Management expects service revenue to improve as more subscribers switch from data buckets to unlimited data. To be sure, the new lower-tier unlimited plan is still more expensive than most of Verizon's old data plans. But that trend could be offset by early unlimited adopters downgrading to save a bit more money while staying on Verizon's network.
Service revenue will be something to keep an eye on through the second half of the year, and be on the lookout for semi-annual network quality reports from third parties to see if Verizon's network strength is holding up with the influx of unlimited data subscribers.