Verizon’s (NYSE:VZ) LTE plans were boosted by a recent spectrum swap with T-Mobile, which saw the larger carrier gain AWS and PCS spectrum licenses as well as $2.4 billion in cash, in exchange for 700MHz A-Block spectrum. The largest carrier in the U.S. has completed the initial phase of its LTE rollout on 700MHz, and is now undertaking the second phase, which involves adding data capacity in urban areas. The deal is a big win for Verizon as it not only gains licenses in high-frequency AWS (1700/2100MHz) and PCS (1900MHz) bands, which have higher data capacity than lower bands, but is also able to unload spectrum that it has little use for, at a solid premium. With T-Mobile estimating the value of the transferred AWS and PCS spectrum licenses at $950 million, Verizon has effectively made a gain of about 38% on its $2.4 billion A-Block investment in 2008.
LTE Differentiation To Shift From Coverage To Quality
- How Does The Cost Of Services Of Major U.S. Wireless Carriers Stack Up?
- How Did U.S. Wireless Carriers’ Postpaid Businesses Trend In Q2?
- How Did The Prepaid And Wholesale Businesses Of U.S. Carriers Fare During Q2?
- Key Takeaways From Verizon’s Q2 Results
- Did Verizon Acquire Yahoo’s Internet Business For A Fair Value?
- Verizon Buying Yahoo: Analyzing The Benefits And Challenges
The second phase of Verizon’s LTE deployment is very important for the carrier to maintain its lead in the high-speed 4G market. Verizon is currently ahead of competition in LTE coverage but rivals are fast catching up. Second-placed AT&T is done with covering about 270 million PoPs, or nearly 90% of the U.S. population, with its LTE network. Smaller carriers Sprint and T-Mobile are likely to have reached LTE coverage of 200 and 225 million PoPs, respectively, at the end of 2013. Eventually, each of the four national carriers will finish building out their respective LTE networks, possibly by the middle of 2014. Therefore, it won’t be long before carriers look to differentiate themselves, not in terms of their LTE coverage, but the speed and data capacity of their respective networks.
Verizon’s early lead in the LTE market has served it well so far, helping it add a disproportionate number of subscribers at the expense of rivals in recent years. 2012 saw Verizon rack up 5.1 million postpaid net adds, versus AT&T’s 1.4 million for the full year. The trend continued last year as well, with Verizon adding 2.7 million net postpaid subscribers through Q3 as compared to 1.2 million for AT&T. However, Verizon’s market share gains have slowed down in recent quarters due to rising competition. This can be easily seen in the decreasing discrepancy between Verizon’s and its rivals’ quarterly net adds in 2013, which we believe is symptomatic of the competition gradually catching up with their respective LTE coverages. Sprint’s recent launch of the Spark strategy, with which it expects to reach LTE speeds well in excess of the rest of the industry, could create concerns for Verizon in a largely saturated wireless market.
Growing LTE Usage To Boost ARPU Levels
The carrier is therefore looking to maintain its technological lead over rivals by increasing network density with LTE-Advanced and supporting new features such as VoLTE (Voice over LTE) ahead of rivals. It has already started deploying its existing AWS spectrum for additional data capacity, and the licenses in the high-frequency bands that it has just received from T-Mobile will likely be used to augment capacity in the coming years. This is essential for Verizon to support the growing adoption of high-speed 4G, which has led to burgeoning data usage as subscribers increasingly use data-intensive applications on their smartphones. Although only 38% of Verizon’s subscriber base is on LTE, as of Q3 2013, the LTE network accounts for almost two-thirds of its overall data traffic.
It is therefore important for Verizon to add data capacity and keep its LTE network congestion-free, so that it can drive data revenues and increase its ARPU levels over the coming years. Also, LTE as a network technology not only supports higher speeds but is also more efficient than the current 3G networks at handling data, thereby improving margins by reducing maintenance and handling costs.