With the smartphone market in the U.S. moving closer to saturation, Verizon Communications (NYSE:VZ) is working to expand its presence in connected devices like tablets and other smart devices. One area where the company has fallen behind the competition, however, is in machine-to-machine communications.
AT&T (NYSE:T) is pulling ahead of the competition by telling investors it added 1.3 million Internet of Things devices in the third quarter. Over half a million of those devices were in connected cars and likely stem from AT&T's partnership with OnStar to provide roadside assistance and diagnostics for equipped cars.
Earlier this month, Verizon unveiled its answer in response to AT&T's success: Verizon Vehicle. Let's discuss why Verizon Vehicle represents a huge opportunity for the company and its investors.
The future of Verizon
Verizon's Wireless revenue in the third quarter totaled $21.8 billion. Of that, just $150 million fell under its machine-to-machine communications segment. But the company noted machine-to-machine revenue grew 40% in the first nine months of 2014.
The introduction of Verizon Vehicle, which can be retrofitted into any car built after 1996, represents a huge opportunity for Verizon, especially given that Verizon estimates there are 200 million in-service vehicles that could benefit from Verizon Vehicle. And at $15 per month, attracting just 2% of the market could help grow Verizon's machine-to-machine segment by more than 100%. ($180 million per quarter vs $150 million last quarter.)
Because AT&T is already well-established in the connected car market, most auto manufacturers use AT&T's GSM module to provide access to a wireless network. As a CDMA operator, it's impossible for Verizon to get into certain vehicles unless it offers an after-market device like Verizon Vehicle.
But providing an after-market device may ultimately benefit Verizon more than working directly with manufacturers. Typically, manufacturers are able to exercise leverage over carriers to connect their vehicles to the Internet, which results in low average revenue per device. And while AT&T isn't shy about sharing the number of connected devices it services -- nearly 18.5 million -- it's otherwise quiet about its revenue and margins from those devices. For Verizon, however, providing an after-market device may allow the company to address a larger market with higher margins.
Now's the time to get in
The connected cars market is still growing rapidly. A recent report from Transparency Market Research forecasts the market will reach $131.9 billion by 2019, growing at a CAGR of 34.7%. That revenue number is inflated by expected new car sales with built-in connectivity, but service revenue ought to grow faster than new car sales by including subscriptions from existing connected cars and after-market installs.
Compared to the saturated smartphone and tablet markets in the U.S., the connected car market presents a solid opportunity for Verizon and AT&T. With connected cars, Verizon and AT&T are able to leverage their superior networks. And since roadside assistance isn't very helpful if there's not cell signal, the growth in connected cars should favor the bigger networks.
A strong growth driver
Next year, analysts expect Verizon to add just $3.4 billion in incremental revenue, but machine-to-machine communications could add around $1 billion in incremental revenue on its own with the help of Verizon Vehicle. That leaves just a couple billion in growth from additional tablet subscribers and smartphone upgrades.
In light of the opportunity to accelerate growth in its machine-to-machine communications segment, which is already growing 40% year over year, analysts' estimates seem conservative. Ultimately, Verizon is a slow-growing telecom giant, but Verizon Vehicle positions it well to move deeper into the connected car market and catch up with AT&T.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.