It was just a couple of weeks ago that Verizon Communications (NYSE:VZ) CFO Fran Shammo told investors, "There's going to be certain customers who leave us for price, and we are just not going to compete with that because it doesn't make financial sense for us to do that."
Then last week, Verizon cuts prices on nearly all of its More Everything data plans, making a sham of Shammo's earlier statement. Additionally, with the pressure from T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S) offering to pay for early termination fees, Verizon has offered to pay customers $100 to switch to its service.
So maybe it does make financial sense after all.
That fire is churning
Last quarter, Verizon experienced significantly higher churn than in the past. While its 1.14% postpaid churn rate was still lower than every one of its major competitors, it was by far one of the highest rates in its recent history.
On Verizon's conference call, Shammo told analysts, "At a 1.14% churn rate, you should take that as we did not go to places where we do not financially want to go to save a customer."
The last major phone upgrade cycle came in 2012, but Verizon was able to keep churn at 0.95% during the fourth quarter that year. Churn levels remained at the same level in the fourth quarter of 2013 -- 0.96% -- but steadily climbed throughout 2014.
Certainly the churn rate has been a problem for Verizon, as customers leave for T-Mobile and Sprint. But there may be another reason for the price cut besides trying to keep customers.
While it makes sense for Verizon to let some of its lower-value customers leave for competitors, it's also trying to entice them to upgrade to its 4G network.
Currently, Verizon has 13 million 3G smartphone subscribers who still haven't upgraded to a 4G-capable smartphone or data plan. Additionally, the company is servicing 18.5 million feature phones that represent an opportunity to upgrade to 4G service.
Getting more customers on its 4G network will reduce its overall costs compared to 3G connections because its 4G network is more efficient. It will also allow the company to start re-appropriating its 3G spectrum to further improve its LTE network coverage.
The price cut is notably for a limited time, and I suspect Verizon will be paying close attention to migration from 3G and feature phones onto 4G to ensure that these prices are worthwhile. If enough low-end customers move up to 4G, the price cuts could be worth it for Verizon because of the cost savings.
T-Mobile and Sprint aren't going away
While the message from Verizon in 2014 was largely that the competitive pricing environment created by T-Mobile and Sprint can't last, the message is starting to shift.
T-Mobile's management told investors at a conference last month that it expects to become cash flow-positive in 2015 despite its very competitive pricing. Comparatively, Verizon saw a significant decline in cash flow during 2014 as gross margin pressure from the low-price carriers put a damper on revenue.
Shammo expects the company to return to positive cash flow growth in 2015 with at least 4% revenue growth. It's worth noting analysts only expect Verizon to grow revenue 3.6% this year. Cash flow growth could be slower, however, as Verizon signs up more customers to its Edge program, which separates hardware billing from service billing -- another trend T-Mobile started.
Whether Verizon sees a net positive impact from its price changes to its More Everything plans remains to be seen. Clearly, however, the company is feeling the impact of Sprint and T-Mobile and can no longer afford to let customers go to the competitors without trying to upgrade them first.