Verizon (NYSE:VZ) may have been the first to launch its 4G LTE network more than a year ago, but customers have yet to take to the new high-speed technology. Speaking at an investor conference Monday, Verizon Wireless’ CFO Fran Shammo said that only about 5% of its total customer base use an LTE smartphone right now.  Verizon is currently well ahead of AT&T (NYSE:T) and Sprint (NYSE:S) in terms of LTE deployment with coverage in 196 markets across the U.S. It has also been actively promoting its LTE technology through the launch of cheaper smartphones and plans and we believe LTE adoption rates are only going to pick up from here.
LTE still in its infancy; To come of age in 2012
LTE, as a nascent technology, has had numerous shortcomings. Current smartphones that support LTE are not only pricier than their 3G counterparts but also bulkier and highly power-inefficient. This is because the the chipset technology had not matured enough to provide integrated cellular modems with LTE capabilities. Moreover, the chipsets were built on a 40nm manufacturing process that made power-efficient designs with LTE difficult. In addition, Verizon’s LTE technology has been plagued by numerous outages, the latest of which occurred only last week. 
But with the launch of Qualcomm’s latest integrated baseband chipsets last week, the answer to the first two problems has finally arrived. Not only are the baseband chipsets integrated on the core Snapdragon processor but are also built on a 28nm manufacturing process that conserves space and power, thereby removing two of the most significant bottlenecks that could have come in the way of mass 4G adoption. (see Qualcomm Gives The Wireless Industry A Reason To Celebrate)
Verizon is also slowly bringing down the prices of its LTE smartphones as an increasing number of customers adopt LTE. The latest Droid 4 offering from Verizon is available for only $199. In addition, the wireless carrier is currently promoting an LTE data plan that offers twice the usual monthly data allotment for half the price. 
Promotions and better chipsets aside, Verizon will now have to fix the bugs that have been causing the frequent LTE outages. Unmitigated problems with the LTE network will hinder widespread adoption as well as tarnish Verizon’s long-standing 3G reputation. However, we see the recent outages as initial hiccups inherent in any early stage adoption of a nascent technology. Thankfully, the outages haven’t come at a time Verizon’s LTE network is being used widely, giving Verizon enough time to identify and sort out the issues.
High network costs to be offset by higher ARPUs
Verizon has been aggressively spending on its LTE infrastructure, rapidly rolling it out in new markets to maintain its lead over rivals AT&T and Sprint as well as making sure the outages do not recur. Its capital expenditures have been rising over the last few years, owing to the rapid deployment of LTE as well as 3G network upgrades, and we do not see it coming down anytime soon. It will therefore be looking forward to an increased adoption of its LTE network as a way of recovering at least a part of the huge capital expenses it has incurred.
The launch of the iPhone 5 with LTE capabilities later this year will help further drive 3G adoption. Although the iPhone 5 may be available on competing LTE networks as well, Verizon’s greater LTE coverage should help it attract more iPhone buyers. Higher LTE speeds will see subscribers increasingly using data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPU levels for Verizon over the coming years.Notes:
- Verizon Wireless Still Largely 3G A Year After 4G LTE Debut, WSJ, February 27th, 2012 [↩] [↩]
- Verizon’s LTE outage problems just won’t stop, GigaOm, February 22nd, 2012 [↩]