Verizon – Increasing Android Mix Can Accelerate Subscription Revenue Growth

Verizon (NYSE:VZ), which primarily competes with AT&T (NYSE:T) and Sprint (NYSE:S) in the mobile business, has traditionally heavily relied on Blackberry smartphone sales. In 2009, more than 80% of Verizon’s smartphone sales were attributable to the Blackberry, whose customers also tend to generate the highest levels of average revenue per user (ARPU). ^[1]

What a difference a year makes. Verizon’s mix of smartphone sales has witnessed a dramatic shift during 2010. Surging sales of smartphones utilizing Google’s (NASDAQ:GOOG) Android OS have seemingly flipped the balance of power away from the previously dominant Blackberry. According to ITG Investment Research, Android-based smartphones accounted for over 80% of Verizon’s smartphone sales during November 2010. ^[1]

The result left Blackberry with just a 19% share, with Palm OS and Windows Mobile phones accounting for the balance. We note that the drastic shift is partially attributable to a spike in sales from customers seeking the latest technology, but believe that the growing market share of Android-based smartphones is a notable trend that could provide real upside to our price estimate for Verizon stock.

Our price estimate for Verizon currently stands at $31.69, nearly 10% below market price. We estimate that mobile phones and plans constitute about 42% of Verizon’s stock value.

We recently wrote an article wherein we quantified the immediate revenue impact for Verizon from a shift to Android-based phones (from Blackberry), and we noted that the initial impact on data revenues from this replacement effect would be minimal. (Android vs. Blackberry, Does Verizon Gain on Android Sales?) However, the complementary impact of increased voice and data plan revenues after this replacement effect finishes should have longer term implications that could generate upside to our price estimate for Verizon.

Greater Smartphone Diversity Could Attract New Customers

A shift in mix of smartphone sales from Blackberry to Android-based phones reduces manufacturer related risk and allows for a wider assortment of products available to customers. This is because Google’s Android OS has been adopted by several mobile phone manufacturers and, because of its popularity, almost 300,000 android phones are being activated each day. ^[2]

As evident from the findings of ITG Investment Research, Verizon’s handset mix has added a new level of diversity over the past year. ^[1] The expanded product offering could accelerate smartphone subscriptions from new customers as well as existing customers that are compelled to upgrade by the larger range of options. As we’ve previously noted, Android can also trigger increased sales by featuring its larger app store (at roughly 70,000 apps) than available on Blackberry (10,000 apps).

A faster adoption of smartphones could provide long-term upside beyond our base projections across both voice ARPU and data ARPU, as the functionality of smartphones typically warrants service plan premiums. Looking at voice subscription plan pricing alone, if Verizon is able to maintain current levels through our forecast period, it could generate more than 5% upside to our price estimate, bringing our number in line with market price.

You can drag the trend-lines in the charts below to see the impact of your own monthly voice and data ARPU projections on Verizon’s stock value. Let us know your viewpoint on these key metrics by providing feedback in the comment box below.

Voice ARPU

Data ARPU

You can see the complete $31.69 Trefis price estimate for Verizon’s stock here.

1. Android annihilated BlackBerry sales at Verizon Wireless, msnbc.com, Dec 10 2010 [↩] [↩] [↩]
2. Andy Rubin: over 300,000 Android phones activated daily, Engadget, Dec 9 2010 [↩]