Bullet Point Analysis: The Implications for Verizon Unlimited

WHAT IS IT?

After many years, Verizon brought back an unlimited dataservice plan announced on Sunday, February 12, 2017 and available February 13.   

Here are the monthly plan details:

• Single line - $80 for unlimited data, talk and text on your smartphone with paper-free billing and AutoPay.
• Two lines - $120 ($60/line)
• Three lines - $160 ($53.33/line)
• Four lines - $180 ($45/line)
• Additional lines after 4 lines, up to 10 lines, for $20/line
•  Mobile Hotspot with 10 GB of LTE data is included at no charge (after 10 GB at 3G data speeds)
• Unlimited calling and texting to Mexico and Canada and up to 500 MB/day of 4G LTE roaming in Mexico and Canada
• HD video streaming
• 22GB is the data threshold when Verizon can perform network prioritization if there is network congestion.

In conjunction with the service plan an aggressive free handset strategy is in place to win new (and perhaps old Verizon customers back).  The list includes flagship smartphones - iPhone 7, iPhone 7 Plus, Google Pixel, Moto Z Droid, Moto Z Force Droid, Samsung Galaxy S7, Samsung Galaxy S7 edge, or LG V20. 

However, the free smartphone is only available within a list of 15 eligible devices: iPhone 6, iPhone 6 Plus, iPhone 6S, iPhone 6S Plus, iPhone 7, iPhone 7 Plus, Samsung Galaxy S6, Samsung Galaxy S6 edge+, Samsung Galaxy S7, Samsung Galaxy S7 edge, Samsung Note 5, LG G5, LG V20, HTC 10. 

A $5/month option is available for older devices but the list is shorter: Apple iPhone SE, Samsung Note 4, Samsung Galaxy S5, LG G4, LG V10, HTC M9.

BACKGROUND

Verizon has been the brunt of switching aggression from T-Mobile and most recently Sprint. With the largest postpaid base among the top four carriers, Verizon is the low hanging fruit. And with continued high porting ratios reported by T-Mobile and movement from Sprint, Verizon had to do something.  Moreover, it lacked an unlimited plan that T-Mobile and Sprint harped on in its advertising to win over Verizon customers.  Its large postpaid base and reluctance to offer an unlimited product also raised questions, particularly in the investor community, on whether its venerated network could even handle increasing data traffic within its current spectrum portfolio.   

With a dire competition picture for many quarters and the messaging set in place by former CFO Fran Shammo that subscribers don’t want or don’t need unlimited coupled to preserving good margin, a Verizon unlimited offering is surprising. However, Mr. Shammo has retired and a new CFO Matt Ellis and the new UK-transplant CEO (Ronan Dunne – ex O2 CEO) may have been the impetus to changing Verizon’s unlimited strategy.  Rather than Lowell McAdam’s face (or John Stratton’s or any other long time Verizon executive) to introduce the unlimited plan, it was Mr. Dunne and Nicky Palmer (Network Leader (read network CTO) as fresh PR faces.

ANALYSIS

WHAT’S IN IT FOR VERIZON?

• Retention (Stopping the Bleeding): The port outs to T-Mobile and Sprint have impacted Verizon’s bread and butter postpaid sub base.  A new unlimited offering will placate those legacy/grandfathered subscribers who feel pushed out with increasing onerous conditions to keep their grandfathered unlimited plans. Moreover, with a valuable business segment that may want monthly price predictability without data pooling, an unlimited plan will lock in loyal accounts. 
• Switching (and switching back): The free smartphone offer is attractive for former Verizon customers who left for competitors within the last 2 years (e.g., for trade-in, the iPhone 6 is a little over 2 years old).  Against T-Mobile, the advertised gap is only $20 (though T-Mobile One is tax/fee inclusive). $20 may be enough for less price sensitive customers and Verizon loyalists to return. 
• Network Reputation:  Verizon has always done well with the ‘map’ that shows its national coverage lead but T-Mobile has been very vocal specifically about its network parity (covered LTE POPs) and faster download data throughput against Verizon’s premium network message.  By offering an unlimited product and highlighting leadership in small cells and sprinkling in leading edge LTE technology, Verizon is stating that its network can handle the network traffic.  Not to be forgotten is the delayed LTE-U (or LAA) impending commercialization likely in 2017 that will help the load.
•  Feature Differentiation: Unlike the Verizon of old where customers need to pay extra to turn their phones into a mobile Wi-Fi hotspot, a healthy 10GB is included. Against T-Mobile or Sprint, this isn’t much but against AT&T, it stands out.  A nuanced jab at T-Mobile is that video may be streamed in native HD against T-Mobile’s extra fee to get HD capability.
• Cost Containment: The new unlimited plan has two caveats – electronic billing and autopay.  These features are very much prepaid in nature and in a macro sense, speaks to cost savings of generating paper bills. Automating the payment process streamlines any handling for paper checks as well as in-store bill payment handling. As in prepaid, autopay is a nice anti-churn measure.

COMPETITOR COMPANIES' IMPACT?

• Sprint: Price leadership has been Sprint’s hallmark for a year or so.  This has been their strategy to turn itself around from negative losses to positive net addition growth.   The surprising Sprint promotion announced a day ahead of Verizon’s announcement (5 lines of unlimited service for $90) makes a lot of sense now.  Keeping a lid on price moves is difficult in this industry and the coincidence of Sprint’s promotion suggests to me that they got wind of Verizon’s offering ahead of time.  Sprint will still get the price seekers but may be blunted somewhat for those Verizon loyalists that haven’t been pulled the trigger to the Sprint camp.  With the new Sprint promotion, I’d expect that a marketing campaign be launch pointing out that Sprint’s unlimited is half that of Verizon’s. 

With thinner margins, Sprint’s financial challenge is cannibalizing revenue from the existing base that wants this less expensive offer.  Yet the other side of the coin is that they could lock these migrating plan customers in for another two years.

• T-Mobile: While I characterize Sprint as the price leader, T-Mobile is, in my view, the value carrier and the biggest continued threat to Verizon.  With an effective network parity message and an expanding national LTE footprint, the number three carrier has so much momentum that Verizon will find it difficult to fully stop T-Mobile. Given a public target to increase national distribution doors (in areas where it never operated) in 2017, I believe Verizon will continue to be negatively affected but perhaps slightly diminished porting.
• AT&T:  With only an unlimited plan only available as a bundle with DirecTV, AT&T is the odd man out amongst its peer group without a standalone product in its plan portfolio.  AT&T’s strategy has always been to cross and upsell to increase revenue from its existing base, and in turn bring higher margins (EBITDA service margin, in the Verizon range).  To veer from this strategy will be tough as it has garnered quite a bit of criticism with quarterly phone customer losses. Though AT&T claims many of those phone losses are feature phone customers, Verizon has been its longtime nemesis as both carriers contend for the premium customer, consumer and business. History has shown that it responds almost tit for tat against Verizon and have largely ignored plan moves from Sprint and T-Mobile.  However, there must be a lot of debate happening in Atlanta and Dallas on the course forward.  My view is that AT&T must respond and improve on its unlimited offering as it is the most vulnerable.  Though the wireless-DirecTV unlimited wireless offer sets the same price point for 4 lines at $180, there’s fine print. First, month one and two are at $220 and only at month three is the 4^th line considered free.   More importantly, after line 4, additional lines are at $40/month, clearly short of Verizon’s (and T-Mobile’s) $20/month.  If not to save the premium consumer base that has been slipping for several quarters, AT&T needs an offer to its coveted medium and enterprise business segment that has been fueling sub growth and offsetting those consumer losses.

DIRECTVNOW PRESS LAUNCH - 11/28/16 + GROWTH

On Monday, November 28, AT&T launched DIRECTV Now to the press and media.  DIRECTV Now represents a huge growth component for AT&T. While many people look at the details of price, number of channels, and UI/UX, all these will continually be refined as the company markets its existence. The key point here is that the foundation was the DIRECTV (DTV) acquisition that enabled AT&T to springboard beyond its flattening wireless growth and its declining wireline and satellite business units.

Also key to the DIRECTV Now success is leveraging and further exploiting all the legacy DTV content relationships. If one follows the PR content announcements, it's easy to see why there had been a flurry of activity to locking in those content partners as the lynchpin for DIRECTV Now's mainstream premium content messaging. It's also why the Time Warner merger makes so much sense in the long haul - owner's economics and continued content resale to competitors. AT&T's longterm DTV play is to compete effectively outside of its wireline footprint. That's already in motion with its DTV satellite business but in comparison DIRECTV Now's customer acquisition costs are minimal as social media will be the foundational component in this streaming service. As John Stankey put it, DIRECTV Now is going after underpenetrated subscribers that do not want to have a longterm wireline contract, are transient/mobile and may not pass credit checks. These are the same traits for subprime, prepaid and millennial demographics.

PRICING

One of the biggest question marks was the package pricing as only a $35 price point had been leaked earlier. Well, there are two $35 price points - one promotional and the other, 'permanent.' The promotional price will certainly draw a great deal of interest and potentially eat into cable & Verizon FiOS bundles - double and triple plays, especially when the consumer can save money on the set top box/DVR rental (i.e., I pay $12/mo).

 

Directvnow launch from 556Ventures

DISTRIBUTION

I give AT&T's DTV folks credit in lining up all the relevant distribution partners of the DIRECTV Now app - on Apple TV, Roku and Amazon Fire TV (Chromecast is missing - I guess for now) as well as in the expected iTunes and Google Play stores. The Apple allure will be a huge driver for DIRECTV Now's success with Prepaying 3 months of service and receiving a free Apple TV.

One other surprising and disruptive approach is aligning with LeEco, the emerging Chinese consumer brand of smartphones and televisions. Here, a DIRECTV Now subscription is thrown in (terms vary by device). This DTV/LeEco deal will surely go a long way to build LeEco consumer brand awareness faster and more impactful than that of Huawei, ZTE, OnePlus, etc.

I can go further in the UI/UX but that's for another post.

On the Road to 5G

I participated in a RCR Wireless Webinar on 5G - "Breaking Down the 5G Future" recently along with representatives from Sprint, Nokia, Qualcomm and National Instruments.

5G's is exciting, with a lot of pressures on the use cases and business models. Lots of promises that need to be delivered. My view is some of the promises are being tested in today and tomorrow's LTE/LTE-A environment, ready to evolve in 4-5 or more years.



Here's the video.

AT&T - Verizon Rate Plan Competition, Playing for Parity

In July, Verizon changed their wireless rate plan portfolio. The media and tech bloggers derided those changes because the new price points were higher than those replaced.  Verizon argued (logically) that in the end, new plan subscribers got more MB/$ spent.  Yes, the math holds true.  I argued back then that while many focused on the lower (consumer) price points, the real threat was to AT&T in the mid and high tiers where high-value customers, SMBs and enterprises shopped.

Fast forward to mid-August as AT&T has announced their own rate changes.  No longer is the portfolio named Mobile Share Value but now Mobile Share Advantage (MSA). The "Advantage" piece speaks to ridding of the overage penalty and providing consumer friendly (albeit punishingly slow) 2G data rates.  Also, expanding the North American for 10 GB subs with unlimited talk/text to Mexico and Canada with local plan capability in Mexico.

The MSA plans to be in effect on August 21st have several important goals:

1. Correct and increase mid-tier competition against Verizon
2. Correct price vulnerability and meet high-tier price parity against Verizon.
3. Increase service ARPU 

Mid-Tier Competition

In the history of rate plan competition, price planners/product managers have at times matched price points, voice minutes or data thresholds.  Every company has their own reasons and their own strategies. With the Mobile Share Advantage, AT&T chose to match price and data at the 16GB level but gave 1 GB more for 25 GB at the $110 price point.  This suggests to me that this may be a high-value customer battleground area.

High-Tier Price Parity

In July, I noted that the Verizon's rate changes threatened AT&T's high-value users  (SMB and enterprise) customers. Historically, AT&T and Verizon usually match each other at these higher tiers with the logic that no one really needs a huge price wars with these (usually) less price insensitive accounts.  Looking at the chart, it's notable how much the pricing has dropped for both these premium carriers.

As a side observation, it doesn't help that Sprint and T-Mobile are actively going after these higher value postpaid accounts.  

Though AT&T's changes for the most part draw level to its largest competitor, Verizon has a 2GB/line promotion applicable to  XL levels and above.  

It is unclear when this 2GB promotion will end, AT&T is still under the competitive gun, especially as the 3Q16 ends and ultra-competitive 4Q16 begins - read iPhone 7 launch.  Whether AT&T will inject a similar promotion remains to be seen but the threat is formidable unless the carrier can change the playing field with an aggressive handset promotion or trade-in values.  

Boost Service ARPU

Lost in the changes in price points is the increase in the per line access fee. What was $15/line/month at plans greater than 15 GB and $25 for plans less than 15GB/line/month, the new access rate is $20.  This is in line with Verizon's.  While I saw the lower $15 as a price differentiation, the new hike falls in line with AT&T (and Verizon's) march to higher profitability per user/per account.  One can also argue that with the mid and high-tier offerings, AT&T is giving away more GB so there needs to be a monetary balance to make up for it.

Asterisk*: For business plans, AT&T has kept the $15/month access line to give it that price differentiation.

Moreover, with service revenue trending downwards thanks to EIP, anything to reverse the decreasing ARPU trends and at the same time increase the average revenue per account (ARPA) will be welcomed by the CFO's office.  As AT&T iPhone 5, 5s and 6 users upgrade to the new iPhone, service reps will invariably push the new MSA plans as a new value with lower pricing, by default fighting any switching thoughts. 

Pricing Strategies

Many may be puzzled why any Verizon and AT&T rate changes are against each other and not Sprint and T-Mobile. It's simple, Verizon and AT&T position themselves as premium carriers and focused on purely profitability.  From a corporate revenue standpoint, there is no need to race to the bottom and upset stable revenue trends.  However, it is exactly this stance that Sprint and T-Mobile with less postpaid base are willing to take lower profitability margins (relative to the big two) to easily take marketshare. T-Mobile's positive porting numbers against Verizon and AT&T quarter over quarter speaks to the big two's profitability handcuffs.  Of course with the introduction of T-Mobile One and Sprint Unlimited Freedom may continue to claw for AT&T and Verizon high data consumers. 

2Q16 US Mobile Carrier Wrap & Scotch

An end of the second quarter 2016 wrap up of the top 4 US carrier community. We discussed T-Mobile quickly with smatterings of Verizon's new head of wireless hire, Ronan Dunne and their path to retort T-Mobile and Sprint.  As with previous Carrier Wraps, we discuss prepaid and postpaid trends.



We end by discussing our picks of the session - Glenlivet Nadurra and Macallan 10 yr Fine Oak.