Verizon (NYSE:VZ) will be introducing the much talked about Share Everything plans on June 28th. Once these multi-device data share plans take effect, Verizon will scrap the older family as well as individual tiered plans for new Verizon customers. While the existing Verizon subscribers with tiered data plans won’t be forced to change their plans when they upgrade, the ones with the unlimited data plans will have to switch to one of the tiered plans unless they purchase an unsubsidized phone.
Unlimited plans have become highly unprofitable for Verizon and AT&T (NYSE:T), both of which stopped offering the plans last year as the demands on their networks increased due to growing smartphone usage. As 4G LTE becomes the new standard and spectrum gets scarcer, Verizon will be looking to gradually kill these plans completely and monetize every last byte of data that is transferred on its network. It will also look to drive the adoption of other data-only connected devices such as tablets, telematics and M2M devices as we expect most of the future growth to come from these devices.
Move might decrease capital expenses
Verizon and AT&T have both moved to throttle the highest 3G data users in recent times, claiming that the move affects only the top 5% of their subscriber base. This small fraction of the subscriber base are the grandfathered unlimited data subscribers and will be the most willing to jump to LTE for the higher speeds that the technology affords. Using the 4G technology as well as its market-leading LTE coverage as bait, Verizon will be looking to gradually eliminate this problem child altogether. It remains to be seen how many of these users will be willing to forego their unlimited plans for an unsubsidized phone but even if a majority do not, Verizon doesn’t have to worry about the huge upfront subsidies anymore and can use the extra cash to fund the network upgrades.
Since the move does not affect a vast majority of its unlimited plan base that uses less data than the corresponding similar-priced tiered data plan, it is not a high risk strategy for Verizon. On the other hand, if Verizon had chosen to continue the unlimited plans for LTE upgrades, the small proportion of the unlimited data users would have taken advantage of the higher speeds to use an even higher disproportionate amount of data. This could have forced Verizon to spend even more aggressively on its 4G capacity improvements than it had to do on 3G. Verizon has seen its capital expenses mount over the past couple of years as it has spent on improving 3G capacity as well as rapidly rolling out LTE in new markets. It will now be looking to control its capital spending with LTE available in many U.S. markets.
While increasing ARPU levels
This bet on LTE might work after all as Verizon has already milked the data demand enough with its 3G network. Now that the demand for data services is exploding but the supply of wireless spectrum is limited, Verizon will be looking to wrestle back control of the data plan pricing.
Offering shared data plans gives the carrier more control over how much data it can afford to offer for a particular price without straining its network. The shared data bucket will also be beneficial for many users as they will be able to use multiple devices in the same data bucket, potentially decreasing the per device costs for a family. It also allows for a more efficient allocation of resources veresus earlier when a few high data users used to clog the network to the detriment of the rest.
Further, as the demand for other connected devices rises, shared data plans will make it easier for users to manage all their device plans from a single account and further spur demand. Verizon’s recent acquisition of Hughes Telematics also shows that the company is getting serious about targeting this high-margin space where AT&T has taken an early lead. (see Verizon Picks Up Hughes Telematics For Connected Devices Push)
However, Verizon needs to get the balance right. While the shared plans would reduce customer churn as well as allow more number of mobile devices to connect to the network thereby earning Verizon more revenues than earlier, it may be passing up on the opportunity of charging more per device and increasing its ARPUs even further. However, the idea here is that since the 4G LTE network is speedier, subscribers will eventually need to jump to the higher tiers as they increasingly use data intensive applications and connect more wireless devices to the Internet.
Further, since all the new shared data plans offer unlimited voice calling and texting, we see Verizon’s move acting as a hedge against the falling voice and SMS usage and supporting the declining voice ARPUs.