Verizon Could Be Raising Prices To Preserve Network Capacity

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Verizon Wireless is America's largest cellular carrier but is facing rising criticism from industry experts and consumers alike for not offering an "unlimited" data plan. This is something that Verizon have continuously said over the last year – they have no plans to introduce an unlimited data offering on their network. The Chief Financial Officer, Fran Shammo, has explained he believes unlimited data is "unsustainable" for today's carriers. As the market leader, Verizon has the most customers and one might think it has the most to lose through not following the industry upstart, T-Mobile (and to a point, Sprint). However, Verizon Wireless is deliberately positioning themselves away from the competition between T-Mobile, Sprint and to a lesser degree, AT&T. Verizon is aiming for quality customers; those able and willing to pay premium prices for a premium service. Verizon Wireless' language and quarterly updates remind the industry that they have a responsibility to shareholders. It does not see the value to be gained for shareholders by chasing what it believes are short term games – that is, scrambling to offer customers the promise of "unlimited" data plans. Instead, it is possible that Verizon are deliberately pricing themselves away from the competition between AT&T, Sprint and T-Mobile in order to preserve its network for the existing cache of high quality customers.

There is certainly evidence within the industry to support this line of thinking. Walter Piecyk of BTIG Research has just published a research document and to paraphrase, one core belief is that Verizon Wireless' network would simply crumble under the "datapocalypse" (a term used by BlackBerry's executives when championing their devices' relative efficiency with data) brought about by customers taking advantage of unlimited data. Verizon's fear is that should they offer customers unlimited data, many would take advantage of this and the network experience for all customers would quickly deteriorate. Those customers currently happy with Verizon's service could be less happy when their smartphones are unable to connect to the Internet and would not be willing to pay a premium price for a network that has not delivered on its premium promise.

Verizon has been repurposing 3G spectrum for 4G LTE, which greatly increases the capacity of the network as the newer networking technologies can handle many more data connections at much higher speeds. Walter's research paper highlights that Verizon's network planners and engineers are rapidly running out of spectrum where they can replace 3G with LTE: the company has promised to keep their 3G spectrum in service until 2020. Furthermore Verizon's old fashioned CDMA networks still carry a large number of voice calls. Older generation networks are less efficient than newer generation networks. Although Fran has denied that Verizon is facing a shortage of spectrum, perhaps the carrier is unable to effectively deploy it? Verizon has also been building out their network through a densification project – that is, saturating urban areas with large numbers of small sites so as to keep data speeds up and minimize the so-called not-spots where customers are unable to connect. Sprint, America's smallest national carrier, is following a similar network densification plan but has explained (as have cell tower businesses) that it is meeting resistance from town and city planners not keen on the cellular operator using many more cell sites. It seems likely that Verizon Wireless will be experiencing the same reluctance from city planners to mount more and more small sites onto buildings and street furniture. These barriers mean it could be difficult for Verizon to materially expand its network capacity in the short to medium term.

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Verizon even recently increased their service charges – although they have also increased data allowances at the same time. Raising prices for a service can be a risky, as the more price sensitive customers will leave. However, those loyal customers who value Verizon's network quality will absorb these price hikes. Verizon increased its data bundles, which suggests the company is still encouraging customers to use more mobile data. And it's recently bought Yahoo giving it access to the core digital media business as a great way to encourage customers to use more data. These changes to the business appear to appeal more to existing customers rather than new ones. Verizon is concentrating on keeping existing customers happy rather than chasing new customers, as we see Sprint and T-Mobile doing. Of course, Sprint and T-Mobile are stealing their new customers from the two larger carriers, AT&T and Verizon.

Verizon's behavior does seem to fit the profile of a business wishing to keep existing customers happy, rather than diluting its premium network with a rush of new, high-data using customers. Yes: as the market leader, Verizon has more to lose than the competition, but their take appears to be shareholder confidence rather than new customers. It will likely take a small number of years before it is understood if T-Mobile's ONE plan will change the industry again, and if we are moving full circle from unmetered Internet in the early days of smartphones, to capped and metered Internet data packages, and back to unmetered Internet plans. Either way, it does seem that Verizon might not be prepared to gamble their existing happy customers on this.