by David Dixon and Mike He of FBR & Co. (edited by Alan J Weissberger)
Shares of the four US national wireless carriers are under pressure following Verizon’s announcement this morning of the return of an unlimited data plan. Verizon (VZ) eliminated unlimited plans following the launch of its 4G LTE network due to higher data usage challenges from early adopters but has resurrected this plan against a backdrop of a higher-than-ever competitive landscape.
We are in a mature environment with four major players where incremental pricing cuts and capex expenditures are NPV  negative. Following several quarters of subscriber net add weakness and elevated churn associated with competitive pricing from T-Mobile and Sprint that was capped by Sprint’s free third to fifth line pricing plan announcement on Friday, February 10th, it seems Verizon has accelerated plans to reintroduce its Verizon unlimited plan as a retention tool, in our view.
Note 1. Net present value is a calculation that compares the amount invested today to the present value of the future cash receipts from the investment.
Why now? In contrast to the first unlimited plan iteration back in 2011, Verizon now has the ability to monitor data consumption and manage abuse. But the primary driver is elevated churn as T-Mobile US (TMUS) and Sprint (S) have become more price aggressive. In particular, TMUS has been drawing more quality postpaid customers from Verizon of late.
■Verizon unlimited plan details: The plan includes $80 for one line, $120 for two lines, $160 for three lines, or $180 for four lines of unlimited data/talk/text and 10 GB/month of LTE tethering with e-billing and autopay. While the plan had been under wraps for a few weeks, we believe Sprint’s announcement of the “$90 for two lines with lines three to five for free” promotion tipped Verizon’s hand. To control abuse, after 22 GB/month has been reached, VZ reserves the right to de-prioritize traffic during network congestion.
■ Likely limited financial impact to VZ. Today, VZ has a very evenly distributed data usage base thanks to its reluctance to embrace unlimited plans. This compares to Sprint and TMUS, where their highest 20% of data users generate 80% of data traffic. VZ introduced a more simplified plan structure last year followed by a self-provisioning capability (Safety Mode) under the My Verizon app. The app allowed customers to completely turn off data access for the remainder of the billing period if the monthly data cap had been reached, thereby avoiding data overages. While VZ took a financial hit, it also saw customer satisfaction increase as it right-sized its data consumption. As a result, we do not believe Verizon unlimited will have a material negative impact as most customers have already right-sized. Reception has been positive thus far, so it should be an effective retention tool. Furthermore, Verizon unlimited is a promotional offer; Verizon can change the time and pricing at any time, which will be a function of its success.
■ Market implications: We expect VZ’s new plan to have more negative implications for TMUS than S. Recently, the bulk of VZ’s customer defections has been to TMUS. We believe today’s unlimited plan announcement could slow the loss of customers to TMUS to a greater extent. However, this could also constrain gross add momentum at Sprint as it ramps up distribution this year.