Verizon faces tough times as 5G fails to generate a decent ROI

In 2021, Verizon spent more than $50 billion at FCC auctions to acquire mid-band C-band spectrum licenses for 5G. Along with AT&T,  it negotiated a high-profile battle with the U.S. airline industry and FAA to put those spectrum licenses into commercial operations at the beginning of this year.

Verizon launched a C-band 5G network covering 130 million people – almost half of the U.S. population- in the 1st quarter of 2022. By the end of the first quarter, around 40% of Verizon‘s customers owned 5G gadgets capable of accessing the network, and it’s already carrying almost a third of all of Verizon‘s data traffic where it is available.

According to results from network-monitoring company OoklaVerizon‘s 5G download speeds doubled via to its C-band network launch.  However, the effort has been costly. Verizon‘s quarterly capital expenses (capex) spiked during the first quarter thanks to the $1.5 billion it spent during the period on the network equipment necessary to put its C-band licenses into action. That figure doesn’t include the extra money Verizon spent on its massive marketing campaign, which included $1,000 handset subsidies and a $1,000 switcher credit, during the quarter to promote the new network.

What does Verizon have to show for all its mid-band 5G investments? So very much as Moody wrote in a report skeptical on 5G monetization.

In the 1st quarter of 2022, Verizon lost 36,000 postpaid phone customers. While that’s certainly an improvement over the operator’s quarterly performance from a year ago, and also better than some financial analyst expectations, it stands in stark contrast to the 691,000 new postpaid phone customers AT&T netted during the periodAT&T, for its part, has delayed slightly its own big mid-band 5G network buildout until next year.

Moreover, Verizon executives acknowledged that the company saw a slowdown in new customers signing up for Verizon service starting in February and accelerating into March, just as the operator’s C-band marketing campaign ramped up.

David Barden, a financial analyst with Bank of America Merrill Lynch, called out the situation during Verizon‘s quarterly conference call on Friday. “There was a time when Verizon had the best network and could charge the highest prices. And on these calls we would talk about margins and obtainable market share,” he said. “You guys are now [market] share donors. And we’re celebrating how many 5G phones we have and how much C-band we’re deploying, but it’s not obvious that that’s translating into something tangible that investors can celebrate in terms of financial reward. So can we talk a little about that?”

Verizon‘s management team, including CEO Hans Vestberg, argued that “our focus over time is to grow this business.”

“We’re going to compete well,” Vestberg said, adding that “we see more excitement in the market where we offer C-band.”

“This is going to pay off big time in 5-10 years,” he said of Verizon‘s broad 5G investments.

However, he also conceded that Verizon could suffer from inflationary pressures on its labor and energy costs. And, like AT&T CEO John Stankey, he said Verizon may consider raising service prices as a result.

Verizon has lowered their 2022 guidance to the low end of their previous range on every key metric, and they cut their forecast for service and other revenue growth to flat (from +1.0-1.5% previously).  The company warned that it now expects its full-year 2022 financial results to come in at the low end of its previously announced guidance.  Nonetheless, “we remain well positioned to achieve our long-term growth targets,” Vestberg said.

Analysts don’t seem to agree with Vestberg’s optimism:

Verizon is growing neither its subscriber base nor its ARPU [average revenue per user]. At a time of rising inflationary pressures, pricing power is nowhere to be found,” wrote the colleague Craig Moffett at MoffettNathanson in a note to clients following the release of Verizon‘s first-quarter results. “And on the unit side, Verizon is already losing share. Unless something changes for 5G revenues that still seem rather intangible (IoT, MEC [multiaccess edge computing], or private networks), the growth runway for Verizon would appear rather weak.”

“There are areas for concern outside of the Wireless segment. Again like AT&T, their Wireline segment is a drag on growth that is only getting worse (their results in Business Wireline, in particular, were – like AT&T’s yesterday – shockingly weak). That puts even more of an onus on the Wireless unit to grow.”

“Things aren’t likely to get easier. Consolidated operating revenue (as reported) of $33.6B was 0.3% below consensus of $33.7B. With such anemic growth, the inflation backdrop is a troubling one. Costs will rise faster than revenues.”

Moffett sees “no easy answers” for Verizon. It could “bow to the pressure” and increase promotions, but he noted that this would further constrain average revenue per user growth for both Verizon and the broader industry. The company could stay disciplined with its pricing and promotional strategies, but doing so would risk further subscriber losses at a time when Verizon’s network advantage over rivals is in jeopardy.  “In summary, the path forward remains a challenging one,” Craig concluded.

Financial analysts with New Street Research wrote: “We do remain concerned about Verizon‘s longer-term prospects in wireless, fueled by T-Mobile‘s lead over Verizon on deploying upper mid-band [spectrum] and big lead on total holdings in mid-band spectrum.  Verizon management’s aspirations for strong service revenue growth driven by rising ARPU and growing subscribers also still seem way too optimistic in the face of rising competition from a challenger [T-Mobile] with a similar (if not soon-to-be better) network offering priced at a steep discount.”

The New Street analysts also acknowledged that there are widespread expectations that overall growth in the U.S. wireless industry will start to slow sometime this year and that Verizon could be the first 5G operator to suffer from that trend that may eventually affect all of the market’s players.

References:

https://www.lightreading.com/5g/is-verizons-big-5g-gamble-falling-apart/d/d-id/776998?

https://www.marketwatch.com/story/verizon-earnings-show-loss-of-phone-subscribers-but-strong-broadband-gains-11650629381

Moody’s skeptical on 5G monetization; Heavy Reading: hyperscalers role in MEC and telecom infrastructure

One thought on “Verizon faces tough times as 5G fails to generate a decent ROI

  1. If my experience with Verizon’s 5G Home product is an indication, then it’s clear why they are losing customers. The online purchase experience of the 5G Home was easy enough. I opted for a hybrid approach where I ordered online and picked up the unit in-store. They offer a 30-day return policy, so it seemed fairly risk-free.

    The first red flag was the adhesive that they expect one to put on one’s window to mount the 5G Home unit. As a homeowner, I had qualms about putting something sticky on a window as it might never come clean again. Further, it was easy to picture the unit falling to earth someday if the stickiness of the adhesive weakens. Finally, it wasn’t clear that it would be possible to close the window blinds, given the size of the 5G Home unit.

    Verizon has an app to help find a spot where the 5G Home unit works. It is clear that the location of the 5G Home unit is important, as the app describes moving the unit a few inches at a time until you get a signal. Given this sensitivity, one has to wonder if the performance may change based on the time of year and the resulting change in foliage. It is not clear what frequencies my particular area uses, but it is probably C-Band. This is because Verizon just notified us that service is available and there are no apparent small cells in our area (and none that have recently been constructed).

    I tried to receive the signal from every window on the 2nd floor of my townhome. I even tried the deck, thinking that the townhome’s metal roof might be attenuating the signal. It is worth noting that the T-Mobile Home Internet service works at my domicile.

    So, after an hour or so of trying, I gave up and decided to take advantage of Verizon’s 30-day return policy. The online chat help bot suggested that the unit could be returned to the store. When brought to the store, the person at the door said they weren’t ready to handle returns of this unit and that it would require the online people to send a return label. Back online, I spent another hour in a chat yesterday trying to get said label before I had to leave without a return label.

    This is so disappointing.

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