All of a sudden, the wireless price war that Verizon (NYSE:VZ) started a couple of weeks ago makes a lot of sense.
At the time of the announcement, which saw Verizon slash the price of its unlimited voice plan by $30 per month, and which resulted in a similar move from archrival AT&T (NYSE:T), I was a little surprised. After all, the Wireless division was doing brisk business in the face of a recession, taking large chunks of market share from the likes of Sprint (NYSE:S) and Deutsche Telekom's (NYSE:DT) T-Mobile.
Even the massive popularity of Apple's (NASDAQ:AAPL) iPhone couldn't slow down Verizon's momentum too much, as its superior network coverage and strong end-to-end handset lineup remained big competitive strengths. And with Motorola's (NYSE:MOT) Droid also emerging as a flagship consumer phone of sorts (albeit no iPhone killer), you'd think that the last thing Verizon needed to do was put its margins at risk by stoking a wireless price war.
And if you take a look at Verizon's latest earnings, the Wireless division looks like it was still in pretty good shape at the end of 2009, even if its numbers weren't spectacular. The division's operating margin dropped 2.4% annually because of higher phone subsidies, and the 2.2% drop in the division's retail average revenue per user (ARPU) is slightly troubling, considering it happened before the price cuts took effect.
But at the same time, the 2.2 million net subscriber additions (1.2 million direct retail adds, and 1 million through re-sellers) was quite solid, considering how high the wireless penetration rate already is in the U.S. And the steady growth in the retail data ARPU, which grew 16% annually to $16.24, is welcome news.
But if you turn your sights to Verizon's underwhelming Wireline division results, which was the main culprit behind its revenue and earnings miss, then the logic behind its price cuts becomes a lot clearer. Simply put, Verizon can't afford to see any major decline in its Wireless division's growth rate -- as difficult as that is with the market share gains it's already seen -- when the Wireline division's attempts to hold water are falling flat.
Wireline's revenues fell by 3.9% annually, driven by a whopping 10% annual decline in the number of traditional local phone lines the company has in service. The collapse of the traditional local loop at the hands of wireless and voice over Internet protocol (VoIP), long predicted by plenty of tech pundits, is now happening at a pretty stunning pace.
And while the local loop's demise is accelerating, momentum for Verizon's FiOS fiber-to-the-home platform now seems to be going in the opposite direction. FiOS net TV subscriber additions were only 153,000 for the quarter, about half the level achieved in Q4 2008, and also down from the 191,000 found in Q3.
What's more, with Verizon planning on keeping its 2010 capital expenditures roughly flat with 2009, which was down slightly from 2008, it doesn't look as if Verizon's FiOS investments will be getting the second wind needed to rejuvenate its subscriber growth.
That leaves the Wireless division to keep the company's top line healthy. And in the absence of an iPhone arrival in the short term, it looks like this strategy will come at a price -- literally.
