Verizon remains adamant that its nearly $7 billion acquisition of TracFone will close before the end of the year, yet lawmakers and consumer groups continue to push for conditions on a transaction they deem harmful to consumers.
This is all happening as the object of Verizon’s desire is losing subscribers. During its second-quarter earnings, TracFone owner América Móvil reported a loss of 549,000 prepaid customers at TracFone, which ended the quarter with 20.3 million subscribers compared with 20.9 million at the end of the first quarter.
TracFone’s Lifeline brand, called SafeLink, accounted for the majority of the losses, at 378,000. It’s also the brand most at the center of controversy. TracFone’s largest single brand, Straight Talk, reported losses of 106,000 for the quarter.
According to Wave7 Research, TracFone’s loss is a bad sign for the prepaid sector. Granted, AT&T reported a
stellar second quarter, with 174,000 prepaid additions. At Verizon, second-quarter prepaid subscribership increased by 18,000 net adds.
But the management at América Móvil sees consumer activity swinging away from prepaid and toward postpaid, in part due to more Covid vaccinations and the expected changes in spending patterns.
“Contrary to what happened at the peak of the pandemic where wireless subscribers felt more comfortable taking prepaid plans, we are now seeing stronger demand for postpaid which has intensified due to the strong commercial activity and promotions in that segment,” América Móvil stated in its second-quarter
report, noting that handset supply limitations was a contributing factor.
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During Verizon’s second-quarter earnings call on Wednesday, Verizon CEO Hans Vestberg reiterated that the company expects to close its acquisition of TracFone by the end of this year. Under an MVNO agreement, Verizon’s network powers the majority of TracFone users, but TracFone uses other networks as well.
On Wednesday, a group of lawmakers sent a
letter to FCC Acting Chairwoman Jessica Rosenworcel asking that the transaction, if approved, include conditions that ensure Lifeline subscribers still have a chance to get affordable service under the proposed new ownership. It’s a familiar ask, and Verizon repeated plans to serve those customers.
"The proposed Tracfone acquisition will bring value and benefits to value-conscious consumers in a myriad of ways,” Verizon said in a statement Wednesday after the lawmakers’ letter to the FCC. “As we continue to work through the regulatory review process, Verizon looks forward to providing current and potential TracFone customers with more choices, better plans at flexible prices, and access to our 5G network, all while we expand our offerings to value-conscious and low-income consumers. Lifeline is foundational to the acquisition, and in response to calls for time commitments, Verizon has committed to the Lifeline program for at least three years."
Looking for growth
Considering TracFone’s lower subscriber numbers and Verizon’s historically negative stance on prepaid, one has to wonder why Verizon is so intent on buying TracFone. Traditionally, Verizon has not only shied away from prepaid, it’s practically shunned it.
Like any acquisition, the hopeful owners think they can do a better job making the company profitable. And part of it has to do with the changing of the guard in Verizon’s leadership, said Bill Ho, principal at 556 Ventures. Both CEO Vestberg and Ronan Dunne, EVP and Group CEO of Verizon Consumer, started their careers in Europe, where operators led the prepaid industry.
Indeed, in talking about TracFone at an investor event last year, Dunne noted his experience in the U.K. market, where he was CEO of Telefónica UK (O2) before joining Verizon in 2016. The U.K. market was more than 70% prepaid when he first started in the business. Eventually, that swung to about 30% prepaid as consumers migrated to postpaid.
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Historically, U.S. prepaid plans were targeted at those with no credit or bad credit, and churn was notoriously high. That’s in contrast to postpaid, where operators like having the customer put their monthly bill on autopay; churn goes down because it's automatically linked to that account or credit card.
Nowadays, prepaid churn is more manageable and for Verizon, it can be a source of growth. “From a business standpoint, Verizon, which is really conservative, is going on a limb, going into prepaid,” where there’s lower ARPU than they’re used to, and they’re inheriting the Lifeline program, Ho said.
Surely, Verizon management believes they can make TracFone more profitable than the existing owners, leaning on their own “owner’s economics” to lower costs. Verizon often talks about its Networks as a Service platform, where it can drive down costs and therefore make a profit as the number of subscribers on its network grows.
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“The question is, can they drop the cost down to serve those customers and then make a decent profit,” Ho said. TracFone’s success historically has been in Straight Talk, the brand sold at Walmart and elsewhere, with attractive ARPUs in the mid-$30s. The other brands will need to contribute as well.
Broadly speaking, the demand for prepaid has gone back and forth over the years, and the line between postpaid and prepaid certainly has blurred. “To some extent, the blurring is the plan,” he said, referring to increasingly similar monthly plans offered to both post and prepaid customers.