Why Verizon Investors Should Be Wary of Pricing Pressure

8/28/17

By Daniel B. Kline, MotleyFool

Verizon (NYSE:VZ) has held up well in the face of intense competition from T-Mobile (NASDAQ:TMUS) and Sprint (NYSE:S).

In its most recent quarter, the wireless giant saw its adjusted earnings per share come in at $0.96, compared with $0.94 in the prior-year quarter. The company also enjoyed 590,000 postpaid smartphone net additions while delivering retail postpaid phone churn of 0.70% -- less than 0.90% for the ninth consecutive quarter.

Verizon CEO Lowell McAdam celebrated the company's results in the earnings release: "Verizon reignited its growth engine in the quarter, both adding and retaining wireless customers while scaling our media business and continuing to invest in our superior networks." He continued, "With record customer loyalty and a clean sweep of third-party network quality results, we're leading the way to provide customers with next-generation broadband, smart cities, telematics, media and Internet of Things services."

However, McAdam failed to address one major concern for shareholders -- how the nature of competition between the major wireless providers is changing.

A woman points at a coverage map in a T-Mobile store.

T-MOBILE HAS IMPROVED ITS NETWORK. IMAGE SOURCE: T-MOBILE.

What Verizon should be worried about

McAdam referenced sweeping network quality tests, but that's only true of one of the two widely accepted industry surveys: The company won all the first place awards in the most recent RootMetrics Mobile Performance in the United States report on the national level.

What he didn't say is that the second report from OpenSignal showed T-Mobile taking first place in every category. That's troubling, because Verizon has built its business on charging a premium in exchange for the best service.

The company still has a top-tier network, but it's no longer a clear standout. Sprint has been pushing the notion that all networks are now very competitive, and the OpenSignal report supports that idea. As consumers realize this, it could force Verizon to further compete on price. Either it lowers prices or loses customers to cheaper -- in some cases much cheaper -- rivals. Below you can see the cost of unlimited data plans for the industry leaders:

Carrier1 user2 users3 users4 users
Verizon $80 $140 $160 $180
AT&T $60 $115 $135 $155
T-Mobile $70 $100 $140 $160
Sprint $50 $90 $95 $100

CHART BY AUTHOR. ALL PRICES ARE AS OF AUG. 14, 2017 AND SUBJECT TO CHANGE.

What happens next?

At the moment, Verizon still enjoys a legacy advantage. Many customers won't consider leaving, because they're happy with their service.

But as Sprint and T-Mobile inevitably hammer home the message that their networks are good enough (Sprint) or potentially better (T-Mobile), while offering lower prices as well, you can see how the incentives mount for people to switch carriers.

Due to competitive pressure, Verizon has already been cornered into offering unlimited data plans, which lost the company any revenue from overage fees and customers who subscribed to bigger plans than they needed.

Going forward, assuming T-Mobile and Sprint keep pace with their networks, Verizon will most likely have to lower its own prices down the road or risk losing customers.

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