Last week, Verizon CFO Fran Shammo made it very clear that his company has no intention of offering Data Stash or any other discounts or promotional programs to compete with the Un-Carrier. AT&T, on the other hand, has bowed to the pressure and offered copycat promotions such as Data Rollover.
Earlier this month, T-Mobile management expressed its satisfaction seeing the competition trying to copy its initiatives, as it puts the spotlight on how differentiated the Un-carrier service truly is. But Verizon refuses to play that game, even if the company loses a few customers as a result.
Growing in an ultra-competitive market
Despite the intense price competition in 2014, Verizon was still able to grow its wireless business. The wireless division added $1 billion of EBITDA and 1.3 million net subscribers during the year. However, the company did experience higher churn and lower profits last quarter as competition intensified.
Many believe this competitive dynamic cannot last. Deutsche Telekom management recently expressed concerns over the sustainability of the Un-Carrier initiatives of its subsidiary. On the other hand, T-Mobile management has noted that it sees the current environment as the new normal, and it expects to generate positive free cash flow this year.
The competition might grow even fiercer this year, as Google is reportedly entering the market as an MVNO piggy-backing off T-Mobile and Sprint's networks. The search giant is likely to offer high-value services at very competitive prices, similar to its Google Fiber efforts.
Increasing revenue with higher churn
Refusing to budge, Verizon will inevitably lose some subscribers seeking better prices or value. CFO Fran Shammo is fine with those customers leaving as they represent little value for the company. This year is an opportunity for Verizon to turn some of its low-value customers into higher-value ones.
The company still has 13 million subscribers using 3G phones and another 18.5 million using feature phones. Ideally, it will transition all of those customers into 4G subscribers in the near future. This network is more efficient, and customers provide higher average revenue. Transitioning more customers to 4G will allow Verizon to refarm its spectrum to make network improvements as well.
Big Red will also look to attract tablet users, who represent a significant opportunity going forward. Currently, tablet customers represent just 8% of the company's subscriber base. While the subscription revenue might be lower than smartphone subscribers, the subsidies are significantly lower. Adding a tablet to an account makes that customer less likely to switch carriers.
A leader, not a follower
T-Mobile is certainly making its presence felt on the industry whether the competition chooses to follow its lead or not. For Verizon, it will be hard for the company to completely ignore pricing pressure.
Indications are that Big Red is already feeling that pressure, which would at least partially explain why profits came in below analyst expectations last quarter. While Verizon will certainly ignore certain challenges from T-Mobile and AT&T, it will not be able to ignore them all if it wants to continue growing revenue and profits.
Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Google (A shares), Google (C shares), and Verizon Communications. The Motley Fool owns shares of Google (A shares) and Google (C shares). 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.
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