Here's Why Verizon Raised Prices on Its Monthly Plans This Week
Editors' pick: Originally published July 7.
As expected, Verizon (VZ) - Get Report announced changes to its monthly plans on Wednesday, and at the heart of them are the telco's focus on its wireless business and its careful approach in the ongoing price discounting battle among carriers.
The new Verizon Plan essentially offers more data per month, but customers will also see their monthly fees rise from $5 to $10 depending on the size of their plan. Also included in the announced plan are new services such as Carryover Data, which will allow users to keep their unused data for another month, and safety mode, which will prevent them from going over theirdata cap and being charged overage fees. These changes will only apply to new Verizon customers.
While the announcement sparked criticism from T-Mobile US (TMUS) - Get Report CEO John Legere who fired shots at Verizon on Twitter (TWTR) - Get Report , calling its peer "greedy bullies," analysts say the new plans underscore the New York-based telco's careful pricing strategy.
"It goes to show you that Verizon's network quality is still at a premium to some of their peers," said Macquarie Capital analyst Amy Yong via phone, adding that the telco has been very disciplined in the discounting war that has been unfolding in the industry for many years.
Yong added that the timing of Verizon's price changes is interesting given the expected launch of faster 5G networks in 2017, and Apple's (AAPL) - Get Report iPhone 7, which is expected to debut later this year.
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At the same time, the announced changes underscore that Verizon is playing catch-up with rest of the industry when it comes to pricing, added Edward Jones analyst Dave Heger.
With the new plans, Verizon is trying to raise average revenue per user (ARPU) and is also essentially bringing down the cost of each gigabyte of data.
"It's positive for the industry. In recent months, pricing has been a little bit more stable," said Heger, adding that Sprint (S) - Get Report and T-Mobile had been pricing aggressors but have lately pulled back from that.
When it comes to network quality and performance, Verizon has largely been seen as the leader of the pack. By contrast, it has historically had a more thoughtful, methodical approach to pricing, Heger added. Now, it's moving to readjust its pricing to what some of its competitors have been offering.
"They do have to keep up with the market," he noted.
Verizon's recent divestitures of its wireline properties -- last year, it sold landlines in 14 states to Frontier Communications (FTR) - Get Report for $8.6 billion and offloaded a portfolio of towers to American Tower (AMT) - Get Report -- have been a headwind to the company's earnings growth, as has been the recent worker's strike. Its ability to return to revenue and earnings growth as it focuses on its wireless business will serve as a near-term catalyst for the stock.
Verizon's stock is up 20% over the last 12 months, and on Thursday afternoon, it was trading down 1.3% to $55.52.
Investors are also carefully watching what will happen with Yahoo! (YHOO) -- Verizon is widely seen as a favorite for the ongoing auction of the struggling Internet company -- as well as with Verizon's ad tech, video-streaming service Go90, spectrum auction and the fiber assets it bought from XO Communications for $1.8 billion earlier this year.
Still, Heger said he doesn't anticipate Verizon to be a "very high-growth company" against the backdrop of a mature wireless sector that will likely see less pricing aggression and churn. The iPhone 7 isn't expected to introduce significant changes, and so the market may not see the type of customer movement it saw with the iPhone 6 in 2014.
The next question remains what will drive the next big shift in the market, Heger said, wondering how much of a role Internet of Things or video will play in the future.
Among wireless providers, T-Mobile has been "the true innovator," he said. The Bellevue, Wash., telco was the first to move to the no-contracts model several years agoand has enjoyed robust subscriber growth from such bold moves. While Sprint has also been aggressive, it's been a "situation of almost desperation where they have to add subscribers at all costs," Heger added.
AT&T (T) - Get Report , on the other hand, should be able to demonstrate earnings upside in the next few quarters as it starts to realize cost savings as part of its acquisition of DirecTV on the wireline side.