Verizon’s Top Spot Threatened As AT&T Catches Up

AT&T (NYSE:T) is now tied with Verizon (NYSE:VZ) at the top spot in terms of wireless subscribers in the U.S., according to industry analyst Chetan Sharma. ^[1] Although both companies include different types of subscribers in their overall subscriber count (Verizon does not include M2M and virtual network subscribers, unlike AT&T), both carriers had about a 34% share of the overall U.S. subscriber market at the end of the first quarter this year, according to Sharma. The other major carriers, Sprint and T-Mobile, had shares of 16% and 14%, respectively.

AT&T is likely to have gained share and caught up with the market leader following its acquisition of prepaid wireless service provider Leap Wireless in March of this year. ^[2] Leap Wireless, which operates under the Cricket brand, had about 4.54 million prepaid subscribers at the end of the first quarter. ^[3] This is the first time that Verizon has shared or lost the top position in the U.S. subscriber market since its acquisition of Alltel closed in 2009. ^[4] However, if we take into account only retail and business subscribers, Verizon would still lead the market with 103 million users, followed by AT&T with about 85 million.

See our complete analysis for Verizon

Verizon has lagged rivals T-Mobile and AT&T in attracting new subscribers in the last few quarters. In the first quarter of this year, while Verizon saw its worst performance in terms of subscriber net adds in the last two years with about 549,000 additions, AT&T improved its net adds by 30% sequentially to over 1 million, and T-Mobile added 2.4 million. ^[5]

In a bid to improve its network quality, retain existing users and attract new subscribers, Verizon introduced an upgraded 4G network earlier this year. The upgraded LTE network, XLTE, has already been launched in over 250 cities and towns and can potentially be twice as fast as Verizon’s existing 4G network, depending on user location. ^[6] We expect the faster XLTE network to help Verizon retain existing subscribers and maintain its market share in the highly competitive and saturated U.S. wireless market. We also expect the carrier to gradually cut prices/tariffs in the wake of aggressive competition from T-Mobile and AT&T, including the former’s ‘Uncarrier’ offerings.

We have a $50 price estimate for Verizon, which is in line with the current market price.

Focus On High-End Subscribers Hurting Net Additions

In order to hold on to its smartphone base, Verizon will gradually have to offer more competitive plans to subscribers. Recent announcements show that Verizon is slowly but surely making similar pricing moves in response to competition, although for the most part the carrier is banking on its network advantage to pull it through the pricing war. In February, the carrier made its first big move, renaming its “Share Everything” data plans as “More Everything” and increasing the data allocation for subscribers. It also made its Edge upgrade scheme more attractive to users by reducing the price of the accompanying service plans, making them look more similar to competitors’.

However, the carrier did not offer deep discounts like AT&T or T-Mobile have, choosing instead to maintain its premium pricing, especially for subscribers on lower data tiers. ^[7] It is therefore not surprising that most of Verizon’s subscriber losses in Q1 this year came at the low end, in 3G and basic phones, which are less valuable than 4G smartphone subscribers. Although we expect rivals’ pricing moves to have an impact on Verizon’s service pricing in the long run, its response so far shows that the carrier will focus most of its efforts on defending its higher-ARPU subscriber base on the upper data tiers.

The Edge Plan & Its Impact On Margins

Verizon introduced the Edge plan last year to aid customers in upgrading their handsets without waiting extended periods of time or having to pay a high upfront cost. Under the initial plan, customers could upgrade their smartphones within six months if they paid 50% of the retail cost of the handset within this period and the rest within the next 18 months. The carrier tweaked this plan recently and increased the minimum payment requirement to 60% of the handset cost, from the earlier 50%. The total financing period has also been reduced from 24 months (6+18) to 20 months (6+14). ^[8]

In spite of the recent tweaks, the Edge scheme creates a win-win situation for both users and the carrier. While subscribers benefit from faster smartphone upgrades as well as discounts on their monthly service plans, the carrier benefits from reduced handset subsidies as the customer ends up paying the full retail price of the smartphone (in installments). The reduced handset subsidies help improve carrier margins, which was evident last quarter with Verizon’s margins improving by 170 basis points over the same period last year to 52.1%.

Going forward, we expect margins to improve as adoption of the Edge plan increases from its current 15% levels. However, aggressive discount offerings and price/tariff reductions from rivals could push Verizon into a price war, which is likely to offset most of the Edge plan margin gains.

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1. US Mobile Market Update Q1 2014, June 2014 [↩]
2. Press Release, AT&T, March 13 2014 [↩]
3. AT&T Q1 Data, AT&T, 2014 [↩]
4. Press Release, Verizon, Jan 2009 [↩]
5. T-Mobile adds 1.3M postpaid subs in Q1, blowing past rivals, Fierce Wireless, May 1 2014 [↩]
6. Press Release-Verizon, PRNewswire, May 19 2014 [↩]
7. How does Verizon’s ‘More Everything’ stack up to competitors’ offers?, CNET, February 17th, 2014 [↩]
8. Verizon tweaks Edge handset upgrade program, as analysts predict installment plans to boom, Fierce Wireless, June 2 2014 [↩]