There wasn't a whole lot to cheer about in Verizon's (VZ -0.53%) first-quarter earnings report, and management latched on to a very interesting metric to start its report.
"Company's total wireless postpaid phone gross additions increased 5.3% year over year," management stated atop its earnings report. But if you look at Verizon's net additions, it actually lost 127,000 subscribers in the quarter.
And while the company pointed to particularly strong gross additions for the consumer segment, the net "additions" were even worse -- minus 263,000.
Verizon has seen its churn rate -- the percentage of existing customers leaving its service -- grow considerably over the last couple of years, and there don't seem to be any signs of improvement. If that doesn't change, Verizon will keep losing customers.
Churning up losses
Verizon was once the market leader in terms of subscriber retention, but something has changed over the last three quarters.
| Period | Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | Q1 2022 | Q2 2022 | Q3 2022 | Q4 2022 | Q1 2023 |
|---|---|---|---|---|---|---|---|---|---|
| Retail postpaid churn rate | 0.81% | 0.72% | 0.74% | 0.81% | 0.83% | 0.81% | 0.92% | 0.89% | 0.90% |
Table by author. Data source: Verizon.
As you can see, Verizon's churn rate has crept up from the low 80s in basis points to 90 basis points starting last summer after it raised rates on subscribers on older plans. Meanwhile, AT&T (T 1.88%), which also raised rates around the same time, saw its churn rate spike, but showed improvement last quarter. It lost just 0.81% of its subscribers per month during the first quarter. That's just 2 basis points worse.
T-Mobile (TMUS 0.57%) has steadily improved churn over the years, and it had a postpaid-customer churn rate of just 0.89% in the first quarter, 4 basis points better year over year.
Verizon has moved from first to worst, and there's no sign of improvement.
Why is Verizon losing customers?
Simply put, Verizon isn't doing enough to keep its customers.
T-Mobile has been touting its 5G network's superiority and the combination of the best value and the best network for a few years now. Verizon attracted a lot of customers by building a better network in the 3G and LTE eras, but that's no longer the case in the 5G era. And while this has been true for a while, T-Mobile said it still has work to do in changing consumer perception. It appears to be working.
Customers have historically been hesitant to leave Verizon because they came to the carrier for its network superiority, and they couldn't trust another network if they switched. But T-Mobile is making it increasingly easier to try its network with a simple three-month trial during which they don't have to change anything.
AT&T, for its part, remains aggressive with its device promotions, offering the same device subsidies to existing customers as it gives new customers. That's been effective in reducing churn, although management says the reduction is thanks to its 5G investments. Third-party network testers might disagree, consistently ranking AT&T's 5G network worse than Verizon's and T-Mobile's.
Verizon also said involuntary churn -- customers whom it is forced to drop because they have payment issues -- returned to pre-pandemic levels last quarter. That produced a bump in churn, but investors can hope that Verizon can recapture those users either with updated payment information or switching them to prepaid plans.
Unfortunately, Verizon is also struggling on the prepaid side. The company lost 351,000 prepaid customers last quarter, although much of that was from its government-subsidized brand.
High switching environment
More and more customers are switching their wireless service provider, and that doesn't bode well for Verizon.
In a market where switching is high, Verizon is a net loser of subscribers, currently exhibiting a higher churn rate on a larger customer base than its competitors. And since Verizon is set to fall further behind T-Mobile on its 5G network and it is resisting competitive device promotions, it will keep losing subscribers throughout the year.
That's going to catch up to its bottom line and free cash flow, and stunt the stock price's appreciation. Investors should look for better places to put their money.
