In its latest move to transition its subscribers away from unlimited plans, Verizon (NYSE:VZ) has launched a limited-period offer called the Verizon Max. The promotional offer is being run in conjunction with its recently launched Edge plans, which allow subscribers to upgrade their smartphones every six months so long as they have paid 50% of the cost of the phone. Verizon initially excluded unlimited plan users from availing the Edge benefits, just as it had done with its Share Everything Plans last year. But the recently launched Verizon Max plan allows grandfathered unlimited plan users to upgrade their phones sooner than the otherwise mandatory two-year contract period. Subscribers will however have to switch from their existing plans to one of the carrier’s discounted 6-8GB tiered data plans launched exclusively for this offer.
With Verizon mostly done with its initial LTE deployment, it is dangling the early-smartphone-upgrade carrot in order to get subscribers off unlimited plans. Increasing the adoption of high-speed LTE is causing wireless data consumption to shoot up, but Verizon stands to benefit only if the unlimited plan users switch to tiered plans and buy into the upper tiers. As 4G LTE becomes the new standard and spectrum gets scarcer, Verizon is looking to maximize the return on its LTE investment by monetizing every last byte of data that is transferred on its network.
Move Might Decrease Capital Expenses
Verizon and AT&T have both moved to throttle the highest 3G data users in the recent past, claiming that the move affects less than 5% of their subscriber base. This small fraction of subscribers are the grandfathered unlimited data users, who have held on to their plans despite Verizon prohibiting them from availing smartphone subsidies last year. They are likely to be heavy consumers of data who do not mind paying the huge upfront costs of smartphones in order to save on service costs later on. It is these high-value subscribers that Verizon is after since transitioning them to tiered data plans will reap rich rewards in the future as LTE usage drives up data consumption needs. By offering 6/8GB data plans at discounted rates, Verizon is hoping that a lot of these unlimited plan subscribers that consume less than 6-8GB per month will see value in the Max plan which also allows them to upgrade their smartphones every six months.
Sure, Verizon is taking a near-term ARPU hit with the discounted pricing but the important thing to consider here is that the data plans on offer here cannot be shared across devices, unlike the Share Everything plans. What this means is that as these users purchase more mobile devices over time, they will be incentivized to buy into the shared data plans at normal pricing. Verizon’s strategy is to gradually ease the unlimited plan users into the tiered platform, before they start taking undue advantage of the higher 4G speeds to consume a disproportionate amount of data, clogging up bandwidth and resources to the detriment of the rest of the network users.
Such a scenario would force Verizon to spend even more aggressively on its 4G capacity improvements than it had to do on 3G. Verizon has seen its capital expenses increase over the past couple of years as it has been spending on improving 3G capacity as well as rapidly rolling out LTE in new markets. By slowly getting rid of the unlimited plans, Verizon is looking to control its capital spending now that LTE is available in almost all 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 is 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 buckets are also beneficial for many users as they can use multiple devices in the same data bucket, potentially decreasing the per device costs for a family.
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 data 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)
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 before. However, the carrier may be passing up on the opportunity of charging more per device and increasing its ARPUs even further. But the idea here seems to be 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. However, in order to fully realize the potential of LTE as a growth driver, Verizon needs to get as many unlimited plans off its network as possible.