On Friday, Verizon announced a new phone strategy, largely misreported as only a plan type change. The announcement, outlined on a conference call by Lowell McAdam and John Killian, encompasses the handset, plan pricing, and the overall distribution strategy of the company. AT&T responded in kind by Friday afternoon, not because they had to, but because the pricing that Verizon proposed makes sense for a maturing industry. Verizon’s eyes are on the end of the year, and they are taking aggressive actions at the beginning (as all good sales folks do) to make their plan.
So why did they do it? Here’s what we know:
– As shown by Ivan Seidenberg’s comments at a recent investor conference (and their subsequent SEC filing), Verizon had nothing short of a spectacular quarter. They had more than a million net post-paid additions, and had a very good Wholesale quarter (StraightTalk is the Carlos Slim-backed pre-paid product). Many of the post-paid net adds came from AT&T users who believe that their Pandora, Flickr, Facebook and YouTube will work better over Droid than iPhone. The tide is turning, and business history teaches that it’s better to act from a position of strength than desperation.
– Verizon is going to be rolling out 4G services in force later this year. Pricing in the 4G world looks more like traditional DSL/ High Speed Internet pricing than the circuit/ voice centric model. Verizon needs to create a bridge from 900 minute pricing plans to $60 (thanks, Sprint) 4G pricing plans. This is not easy and doesn’t happen overnight. (I’m going to go out on a ledge here and predict that data-only handset plans will be commonplace for 4G devices. The thought that circuit switched-quality voice is needed for 20-30% of the Twitter generation is ludicrous).
– There is no way to prop up the access line loss. Several executives from AT&T and Verizon have made comments to this effect. There is no other source to “make it up” with soft enterprise spending and the rapid transition to wireless and VoIP for re-hired employees.
– As outlined in the Sunday Brief and by others, company–owned distribution ain’t what it used to be. Verizon announced on the call that they are going to be moving from 80 to 50 Stock Keeping Units (SKUs), and hope to reduce that even further. At least 20 of these will be smartphones. That’s a big change. To prove my point, go to www.walmart.com and see how many Verizon devices you can buy for free if you are willing to switch from another carrier: of the 32 phone models shown (more if you include colors), 22 are free, including the HTC Droid, Blackberry Curve, Blackberry Tour, and Samsung Omnia. Verizon is setting up a long-term case for fewer retail distribution points, and/or the possible conversion of some current company-owned stores into service centers.
– Wholesale gains yield a lot of price point lessons. Until last quarter, the wholesale channel meant little to Verizon – they publicly stated that the retail market was and should be their focus to yield the maximum amount for their shareholders. However, with 268K net additions in 3Q (the start of the Straight Talk product marketing) and “significantly larger” net adds in 4Q, the Verizon management team rightly asked “How do we capitalize on the trends we’re seeing in Wholesale?” Straight Talk offers unlimited minutes, texts, 2G data, and directory assistance for $45/ month, or 1000 minutes, 1000 texts, 30 MB mobile access, and unlimited directory assistance for $30/ month. Re: the comparable plan for Verizon 2G phones (which are largely free with a 2-yr commitment) costs $70-120/ month. On http://www.straighttalk.com the map looks familiar. Boost’s new pricing plans may have also contributed to the immediate movement: the availability of CDMA plans for Boost, which now include 3G speeds for an additional $10/ month, represent a 33% reduction to the $120 rate Verizon is charging under the new plans. A Blackberry Curve on Boost costs $80/ month vs. $120 in monthly expense on Verizon, a 7 month indifference point with no commitment.
So they get a Verizon-branded hedge with these new plans. More importantly, on lower-end 3G phones, they mandate a $10 upcharge for 25 MB of data which will either a) drive Wal-Mart Verizon shoppers to other providers like Straight Talk (see price comparison above), or b) drive more profits to Verizon retail. Verizon is banking on more data ARPU, and more data+voice customer relationships to migrate to 4G over the next two years. Also, their $20/30 unlimited text point for individuals/family implies a $0.008/ yield for heavy users (2400-3600 SMS/ month or 60-80 per device per day) which, even at these levels, earn returns far in excess of their marginal costs.
So why did Verizon do it? To make unlimited an easier and plausible post-paid retail option. All you can eat bundles are no longer “poor man’s voice” service plans. This is the nail in the coffin of wirleine voice. Next up: Tackling CDMA phone migrations with an aggressive “bring your own phone” rate plan.
Next week, we’ll tackle some earnings season predictions and evaluate the early returns.