After Verizon yesterday announced plans to acquire prepaid wireless seller Tracfone, CEO Hans Vestberg on Tuesday reassured investors that its network is more than ready to handle added traffic from migrating around 7 million new subscribers.
As the largest U.S. wireless prepaid seller Tracfone has around 21 million customers across multiple brands, but 13 million of them already ride on Verizon’s network. The remainder use rival networks under wholesale agreements with the likes of AT&T and T-Mobile.
At a Goldman Sachs Annual Communacopia Conference this morning, lingering questions around Verizon’s network preparedness for 5G and the need to bolster capacity with mid-band spectrum prompted analysts to ask Vestberg about his confidence in the carrier’s readiness to handle millions of new subscribers from Tracfone.
“I feel very confident about the engineers at Verizon that they are engineering the network for the best performance,” Vestberg said, adding that the team “is doing an enormously good job.”
It’s worth noting that at the end of Q2, Verizon had nearly 120 million total wireless connections on its network (the vast majority postpaid, with just under 4 million prepaid).
Despite not adding new spectrum, Verizon’s already shown that headroom in its network has increased, he noted, pointing to factors such as software, the types of devices and network densification as ways other ways of capacity.
“We feel really good about the network and the headroom we created in the network,” Vestberg said.
To that point, he emphasized that Verizon said the deal – valued at up to $6.9 billion – won’t result in any material increase in capex since the carrier won’t need to add a meaningful amount of new infrastructure for added subscriber traffic, “because we can handle it.”
Verizon CFO Matt Ellis expressed similar comments to Wall Street firm MoffettNathanson yesterday, noting a modest amount of incremental capex will be needed in some locations.
“Ellis expects that the incremental 7M subscribers not already using Verizon’s network will be easily accommodated from a network capacity perspective, nothing that those customers over-index in geographies where Verizon currently under-indexes” wrote MoffettNathanson’s Craig Moffett in a Monday investor note about takeaways from the conversation. .
After the deal was announced, analysts at LightShed Partners on Monday suggested there could be some concern if the transition of Tracfone customers happens before Verizon can put C-band spectrum into use.
Verizon is widely expected to bet aggressively for mid-band licenses at the upcoming C-band auction in December. At Goldman Sachs, Vestberg reiterated that Verizon feels good about the assets it has today for 5G rollout, but believe C-band is attractive spectrum and will be a good thing in the longer term.
LightShed’s Walter Piecyk and Joe Galone estimate Verizon carries about 60% of Tracfone’s traffic and would move another 20%, or 3-4 million subscribers to its network within one year of closing. Verizon expects the Tracfone deal to close in the second half of 2021.
“This is manageable, but still should cause some concern as the transition will likely occur before Verizon realize any capacity benefits from C-band spectrum,” wrote the LightShed analysts.
The firm noted “a portion of the remaining traffic might be tied up in multi-year contracts” in terms of ongoing wholesale agreements with AT&T and T-Mobile “but some of that will also transition in year one.”
LighShed estimates roughly 3 million Tracfone subscribers use AT&T’s network, while around 4 million are on T-Mobile’s.
Tracfone buy fits into Verizon’s strategy
Speaking at Goldman Sachs, Vestberg said the Tracfone deal fits into Verizon’s continued overall “network as a service” strategy.
It falls into one of five growth categories that run in parallel to the "Verizon 2.0" vision that the team has been working to execute over the last couple of years. Smaller endeavors like all-digital brand Visible, as well as Yahoo Mobile are also within that “growth vector” as Vestberg called it, which aims to address new segments for Verizon’s network of service potential.
Tracfone, however, is much bigger and will give Verizon the largest prepaid base in the U.S. Having put less emphasis on prepaid in the past, Verizon currently has just 4 million prepaid subscribers, compared to AT&T at 18 million, T-Mobile around 20.5 million and Dish at over 9 million from its recent Boost Mobile acquisition.
At Goldman Sachs, Vestberg confirmed that the decision and timing around the acquisition – particularly just ahead of a 5G ramp, wasn’t a reaction to changes in the industry, such as Dish’s entry into prepaid.
“This was clearly part of our strategy of how we want to execute on the Verizon 2.0 strategy and become GDP-plus,” Vestberg said.
During the pandemic there has been some increased interest in the prepaid segment, he acknowledged, “but that was never the driver,” noting talks with Tracfone started in the last quarter of 2019.
“We can scale our back offices, the network, the billing, customer innovation, and see the value segment gets the best of Verizon as well,” he said, as to why Verizon sees it as a good fit, along with the point that two-thirds of Tracfone traffic already runs on the carrier’s network.
Analysts at MoffettNathanson and LightShed weren’t surprised a U.S. operator is buying Tracfone and see it as a positive.
“Perhaps the most interesting part of the Tracfone deal is not that Verizon is buying it – it’s a clear win for Verizon – but instead it’s that America Movil is selling it,” wrote Moffett, adding the seller’s decision to exit the U.S. “speaks volumes about the state of wireless competition.”
Lightshed Partners believe a sale to a U.S. operator was an obvious option and long overdue. The firm thinks that T-Mobile lost an opportunity, as it could have kept Verizon from becoming a serious prepaid competitor while also taking away an estimated $2.1 billion in wholesale revenue.
Verizon is starting to see greater competition from T-Mobile, the firm wrote, as the latter rolls out its deep trove of mid-band 2.5 GHz spectrum and differentiates itself network-wise. T-Mobile also already claims a low-band nationwide 5G network on 600 MHz.
“Taking the fight to T-Mobile in prepaid could be a new and interesting narrative for Verizon,” wrote Piecyk and Galone.
After the deal Verizon’s prepaid market share will increase to around 34%, versus 28% at T-Mobile and 25% at AT&T, according to LightShed. Verizon also still dominates the postpaid market share at 41% versus 29% at T-Mobile and 28% at AT&T.
MoffettNathanson analysts indicated the deal won’t significantly shift how competitively carriers fight for subscribers.
“The deal is likely a modest negative for T-Mobile and AT&T, both of whom will lose some wholesale revenue for those Tracfone customers who currently ride on their respective networks, but we don’t expect competitive intensity to change as a result in the change of ownership,” Moffett wrote.