Verizon Exceeds LTE Expectations; Will See Margins And ARPU Rise

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It seems having a wide lead over AT&T (NYSE:T) and Sprint (NYSE:S) isn’t going to stop Verizon (NYSE:VZ) from being aggressive with its 4G LTE deployment plans. The largest wireless carrier in the U.S. said earlier this week that it will exceed its year-end target of covering 400 markets with LTE on October 18th, more than two months ahead of schedule. This will take Verizon’s total LTE coverage to 417 markets – a long way ahead of second-placed AT&T’s 76. Sprint, meanwhile, has its recently launched LTE network in 24 cities and T-Mobile is yet to start its LTE deployment.

With the launch of Apple’s (NASDAQ:AAPL) iPhone 5 and several other LTE-compatible Android smartphones, Verizon will look to tout its LTE lead and differentiate itself from other carriers. This will help it increase the adoption of 4G LTE, which has so far been slow to take off. Increasing LTE usage will not only help Verizon recoup the huge capital expenses it has been incurring on LTE but also increase network efficiency and margins. Additionally, Verizon could see its ARPUs increase as higher 4G speeds lead to a surge in subscribers’ data usage.

See our complete analysis for Verizon here

LTE adoption slow so far

Despite the huge lead that Verizon has in LTE coverage, the carrier has so far managed to convert only about 12% of its postpaid base to LTE. There are many reasons why LTE hasn’t seen a wider adoption. Firstly, without AT&T and Sprint’s support, LTE networks are not widely deployed yet. Secondly, LTE handsets have for the most part not only been bulky and highly power-inefficient but also much pricier than their 3G counterparts. Thirdly, being based on a nascent technology, LTE networks are also more prone to outages as we have come to see with Verizon’s over the past year.

However, most of these deterring reasons are gradually fading away.

With the recent announcement, Verizon is likely to cover more than 260 million POPs across the U.S. with LTE by the end of 2012. AT&T and Sprint are also ramping up their respective LTE rollouts, with AT&T planning to cover 150 million POPs and Sprint 123 million POPs by the year-end. So, widespread availability of LTE is becoming less of a concern as months pass by. Also, LTE baseband technology is gradually maturing, making more power-efficient designs possible. Mobile semiconductor leader, Qualcomm recently announced a 28 nm Snapdragon baseband processor that significantly cuts down on battery drain and makes sleeker and cheaper handsets possible. (see Qualcomm Gives The Wireless Industry A Reason To Celebrate) In fact, the availability of this 28nm baseband design was what finally led Apple to come out with an iPhone with LTE capablities, which until last year was deemed to be too much of a design compromise.

Why LTE needs more promotion

With LTE technology maturing, Verizon will look to increase its adoption in order to start recovering at least a part of the huge capital expenses it has incurred. Verizon has been aggressively spending on its LTE infrastructure, rapidly rolling it out in new markets to maintain its lead over rivals AT&T and Sprint as well as making sure the outages do not recur. Its capital expenditures have been rising over the last few years, owing to the rapid deployment of LTE as well as 3G network upgrades, and we do not see it coming down anytime soon.

An increased adoption of 4G LTE will also help Verizon reduce dependence on its 3G networks, which are increasingly burdened by the heavy data usage of smartphones such as the iPhone. Also, LTE as a network technology not only supports higher speeds but is also more efficient than 3G at handling data, thereby reducing maintenance and handling costs.

Helping Verizon increase ARPU levels

Verizon has therefore been aggressively marketing LTE, introducing only those phones that support the high-speed network this year. Moreover, it increased its target year-end LTE coverage to 260 million Americans from the earlier 250 million. It even ran a limited period LTE promotional scheme earlier this year that offered early adopters twice as much monthly data allotment as 3G for half the price.

With the LTE-capable iPhone 5 recently launched, Verizon will be looking to further drive 4G adoption by touting its industry-leading LTE coverage. Other national carriers, AT&T and Sprint, will look to mask their LTE disadvantage by promoting their respective strong points such as the wider HSPA+ network and unlimited plans respectively. But this also gives Verizon’s 4G network a chance to finally get going since promoting iPhone 5’s LTE capabilities will help Verizon increase awareness about LTE in general and increase sales of other LTE-capable devices as well. Eventually, as more subscribers use LTE, the higher 4G speeds will see subscribers increasingly use data-intensive applications on their smartphones. This will drive data revenues, thereby increasing ARPU levels for Verizon over the coming years as users upgrade to higher tiered data plans.

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