Why Verizon May Be Slowly Warming Up To The Prepaid Wireless Market

Verizon (NYSE:VZ), the largest U.S. wireless carrier by revenue, appears to be slowly warming up to prepaid wireless, a market it has largely ignored in the past. The carrier is looking to improve its prepaid retail footprint, recently tying up with some distributors to exclusively sell its prepaid products in physical stores, in addition to launching new data-focused plans and bolstering marketing spending for its prepaid operations. Below,we take a look at a few reasons why Verizon could be rethinking its prepaid strategy.

We have a price estimate of $56 for Verizon’s stock, which is slightly ahead of the current market price.

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Keeping Subscribers On Its Network 

Verizon has typically ignored the prepaid market, due to the potential cannibalization from its high-value postpaid subscriber base. However, the carrier’s postpaid phone business has underperformed in recent quarters, primarily due to a loss of feature phone subscribers to smaller rivals such as T-Mobile and Sprint. Postpaid phone adds declined by close to 80% to about 209k subscribers over 2016. However, the company’s CFO Fran Shammo has indicated that the carrier would rather have subscribers move from its postpaid to prepaid offering, instead of losing them to rivals. For instance, during Q3 2016, the carrier lost about 36k postpaid phone subscribers, while adding 83k prepaid subscribers, noting that prepaid to postpaid migrations accounted for close to half of its prepaid net adds.

Line Between Prepaid And Postpaid Is Blurring, And The Market Is Growing Fast

While prepaid subscribers were typically seen as less valuable from the perspective of wireless carriers, on account of their higher churn and lower ARPUs, the line between prepaid and postpaid has been gradually blurring. Postpaid wireless plans are moving away from service contracts and device subsidies, with carriers encouraging customers to purchase devices separately. On the other hand, prepaid players are transitioning to a monthly billing cycle, and away from the pay-as-you-go model. The prepaid market is also growing at a rapid clip. For instance, the big four U.S. carriers added about 2 million net prepaid subscribers over the first nine months of 2016, translating into year-over-year growth of about 70%. In comparison, postpaid adds slowed down by 30% year-over-year during the same period.

Growing Mobile Data Opportunity On Prepaid Can Help ARPUs

Data attach rates on prepaid connections are also increasing, making prepaid a more valuable business. Verizon has been focusing on these higher-value users, with its new prepaid plans (launched in November 2016) that start at $50 and $70, respectively, for 5 GB and 10 GB of data. This would put ARPU roughly in sync with the carrier’s postpaid offerings, although the data limits are slightly higher. Separately, Verizon also continues to work with MVNO Tracfone, a subsidiary of America Movil, to increase its exposure to the low-end of the prepaid market, without hurting its brand perception.

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