With subscriber growth slowing in an increasingly saturated wireless industry, carriers in the U.S. are looking at ways to tap the increasing demand for connected devices (non-phone wireless connections). Verizon (NYSE:VZ) and AT&T (NYSE:T) have already expressed a desire to introduce tiered data plans that can be shared across multiple mobile devices. Verizon purchased Hughes Telematics Inc., a provider of machine to machine (M2M) technology for cars and medical services, for $612 million in cash.  The acquisition gives Verizon the opportunity to expand its connected devices offerings and increase its market share in a high-growth, high-margin segment, where AT&T has a big lead presently.
We currently have a $42 price estimate for Verizon stock, which is in line with the market price.
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Connected devices grow while wireless market saturates
Wireless data from the CTIA shows that there is a higher number of wireless connections in the U.S. than the U.S. population currently, with the 100% penetration mark being crossed in the first half of 2011.  As the wireless industry gets increasingly saturated, AT&T and other carriers are fighting for new subscribers, especially those that pay for the higher-margin data plans. Excluding tablet sales, which bring in lower average fees, Verizon added about 250,000 net contract-based subscribers and AT&T added only around 7,000 in the March quarter. Overall, the top 7 U.S. operators lost 52K postpaid subs combined in the quarter – an unprecedented decline in the history of the industry. 
While wireless subscriber growth is slowing down, an increasing number of subscribers are adding mobile devices that are not phones – a major reason why the penetration has crossed 100%. These non-phone wireless connections, also called connected devices, saw a 23% y-o-y growth last quarter while prepaid and postpaid connections grew by only 15% and 1%, respectively, during the same period.  While Verizon is the clear leader in net postpaid subscriber additions, growth in this segment has slowed and AT&T has taken a lead in the growing connected device segment with over 40% market share.
Margins to improve
The Hughes Telematics acquisition will help Verizon target a segment that is not only growing at a rate much faster than any other wireless market segment, but is also more profitable. Telematics, M2M solutions for automobiles and TVs, wireless medical pills and other such data-only connected devices use data plans that, although lower-priced, have higher margins because they do not use high amounts of data.
For example, Verizon’s least expensive M2M data plan (on a per MB basis), the 5GB plan, is twice as costly as a smartphone plan with same data limit. If we look at lower M2M data plans, they are even costlier on a per MB basis. A 1GB M2M data plan costs twice as much as a 2GB smartphone data plan.  
The higher margins on M2M data plans will provide Verizon some relief from the increasing pressure of subsidies as smartphone demand climbs.
Verizon’s growing focus in this space is evident as it bought the remaining half of the stake that Qualcomm had in their M2M joint venture, nPhase, in January this year.  Later, it announced partnerships with Sierra Wireless and Axeda Corp. to develop and deploy the next generation connected devices and M2M applications. Moreover, the carrier is planning to introduce data share plans this year, in an effort to make it easier for subscribers to add multiple connected devices to their data plans.Notes:
- Verizon Bets on Connected Car, WSJ.com, June 1, 2012 [↩] [↩]
- Wireless Quick Facts, CTIA [↩]
- US Wireless Market Q1 2012, Chetan Sharma, March 2012 [↩]
- M2M Data Plans, Verizon official site [↩]
- Verizon Smartphone Data Plans, Verizon official site [↩]
- Verizon buys remaining 50% of nPhase joint M2M venture from Qualcomm, FierceWireless, January 5th, 2012 [↩]