Verizon initiatives to grow mobile data revenue will bring growth in 2013

Telecom Lead America: Verizon Wireless reported its most
profitable quarter ever as strong smartphone sales drove an increase in data
revenue which helped margins soar.

Verizon reported total revenue growth of 3.4 percent
year-to-year as strong growth in wireless was able to offset the decline in
wireline sales in 2Q12. Verizon reported a record $5.7 billion operating income
in its wireless segment as margins increased over 300 basis points year-to-year
due to increased data revenues. The operator will drive data revenue growth in
2H12 by expanding its LTE network, diversifying its device lineup, and heading
toward a more data focused strategy with its Shared Everything plans. These
initiatives will strengthen Verizon’s business and help the company maintain
the top U.S. operator position.

Verizon Wireless reported service revenue growth of 7.3
percent year-to-year driven by continued data revenue expansion, which
increased 18.5 percent year-to-year in 2Q12. This growth was propelled by 1.2
million subscriber net additions in 2Q12, including 888,000 postpaid
subscribers. The majority of these net additions were smartphone users, which
helped drive an increase in overall data usage. Data ARPU climbed 15.4 percent
year-to-year to $24.53. Verizon will continue to drive data revenue growth
through the introduction of Shared Everything plans, which revolve specifically
around data usage and various data allotment options.

Verizon sold 2.5 million LTE Android smartphones in 2Q12,
a new record for the operator in its seventh quarter of offering LTE services
and devices. Total LTE penetration reached 12.2 percent in 2Q12, up from 2
percent in 2Q11 and 9.1 percent in 1Q12. Verizon will succeed in quickly increasing
this rate over the coming quarters as the operator already covers 75 percent of
the U.S. population including 337 markets. The iPhone also had a solid 2Q12
performance with 2.7 million sales, including 25 percent of which were new to

Verizon will continue to push its subscribers towards
Android smartphones for multiple reasons. First, the iPhone sells itself and
requires little advertising from the operator. In addition, the Android lineup
has a lower subsidy compared to the iPhone, which will allow the operator to
reduce costs. Most importantly, driving subscribers to Android phones increases
the company’s LTE penetration rate. Of the total 2.9 million Android smartphone
sales in 2Q12, over 86 percent or 2.5 million were LTE smartphones. This allows
Verizon to transfer subscribers to its more efficient LTE network and relieve
some of the stress currently on its CDMA network. TBR believes Verizon will
reach close to a 20 percent LTE penetration rate by the end of 2012. Verizon
will also begin to back Windows 8 smartphones in 2H12, which will add a third
major platform for the operator to attract subscribers.

Verizon’s new Shared Everything plans will begin a shift
towards a more data focused ecosystem that will drive revenue growth going forward

Verizon launched new postpaid data plans in June that
will change the way its customers pay for services. The Shared Everything
tiered structure is designed around data and a multiple device strategy. The
idea is to boost data revenues while also allowing a more convenient way for
users to connect multiple devices to the network. The plans will face some
resistance at first, especially due to AT&T’s July launch of similar plans
and the fact that the current device market is not quite large enough for most
users to gain value from these plans. Individual subscribers will now pay more
per GB on the new plans, but the family plans will result in cost savings as
the number of devices rises.

Verizon discontinued its previous data plan tiers, which
forces new and upgrading subscribers onto the Shared Everything plans. This
could cause some subscribers to switch carriers, since AT&T kept its
existing plans in addition to its mobile plan launch in July, and provides its
customers with the option to choose their plan type. Verizon will see long term
success from these plans as the tablet/internet device segments continue to
rapidly grow, and as more and more devices require a cellular connection. In
the short term, this is also a smart move because the operator will increase
data revenues and solve the issue of declining voice and messaging revenues by
including them in the device connection fees for the plans. This will more than
offset the potential loss of some subscribers.

Verizon’s proposed cable deals are still under review,
yet recent spectrum deals foreshadow Verizon getting approval and becoming an
even larger powerhouse

The $3.9 billion cable deals with Spectrum Co. and Cox
contains two key aspects; the spectrum portion and the cooperative alliances between
Verizon and the cable companies. They are currently still under review by the
FCC and DOJ. Verizon made recent spectrum sales which has helped shift the FCC
towards giving their approval. These include the 1Q12 announcement that Verizon
will sell its 700MHz lower A and B block spectrum, and the June spectrum swap
with T-Mobile. In the later deal, T-Mobile will acquire a portion of AWS
spectrum from the cable deal. The end result should the deal get the necessary
approval will put Verizon in control of an enormous amount of spectrum which
will supply the company’s network plans for years to come. This portion of the
deal is ready to be approved now that Verizon agreed to divest some of the
spectrum to its competitors.

However, the second portion of the cable deal consists of
Verizon FiOS and the cable companies being allowed to resell each other’s
services. This part of the deal is currently under review and is getting a lot
of criticism due to the alliances creating unfair advantages in the market. TBR
believes the deal will be approved in 3Q11 but will come with certain
conditions that will not allow Verizon and the cable companies to resell each
other’s services in markets where it would create a monopoly.

Eric Costa, Research Analyst in TBR’s Networking and
Mobility Practice
[email protected]