Verizon Wireless' (NYSE: VZ) new pricing plans, in addition to doing away with subsidized smartphones and contracts, will likely boost profitability for the carrier, according to financial analysts.
Although customers with cheaper data plans will see a price cut, families and customers with larger data buckets could be paying a bit more than they had been. Further, the shift away from subsidies and toward equipment installment plans will also help Verizon's bottom line.
New Street Research analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam said in a research note that the plans, which go into effect Aug. 13, are "a slight premium" to Verizon's previous More Everything shared data plans. "We think the strategy is the right one for the company, given the pricing from TMUS and Sprint, and Verizon's own capacity constraints; however, VZ's long-term competitive positioning remains challenged," they wrote.
Under the new plans, Verizon made its smartphone monthly access charge $20 across the board, down from $40 for customers who had been on two-year contracts, and down from $25 for customers on EIP with shared data plans that had less than 6 GB of data (it had been $15 for customers on EIP with plans that had 6 GB or more).
The new pricing plans also preserve the old pricing for two-line accounts that use 6 GB, but raise prices slightly on most other account sizes. For four-line smartphone offerings, Verizon offers 6 GB for $140 per month and 12 GB for $160, instead of the previous offer of 10 GB for $140. On four-line plans, VZ is now priced more in-line with AT&T Mobility (NYSE: T) (10 GB for $160), and higher than Sprint (NYSE: S) (10 GB for $100, or 40 GB for $120) and T-Mobile US (NYSE:TMUS) (40 GB for $120).
"Increasing prices is Verizon's best option, in our view. With the network showing signs of congestion in the densest markets ahead of peers, we think it is better for VZ to prioritize revenue and EBITDA per subscriber rather than the number of subscribers," the New Street analysts said. "Absent a major spectrum transaction, Verizon may have to cede considerable share of industry traffic over the next few years (they have close to 40 percent of industry revenues and less than 20 percent of industry capacity). Preserving their value while this happens will be a challenge."
Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata think Verizon's new plans "will lead to better long-term profitability with the benefit of higher pricing trends more than offsetting softer net additions."
Verizon "eliminated its total service pricing premium to AT&T (and other peers) at the $60/3GB single-line total service price point and other lower data allotment single and family plans."
Yet "after running the aggressive $80 for 10 GB ($140 for 4 lines in total) and $100 for 15 GB ($160 for 4 lines in total) promotions throughout 2015 with no pricing response from AT&T, Verizon raised pricing for higher capacity data plans."
The Jefferies analysts noted that "for higher data capacity plans, Verizon's new offers are at a premium to both AT&T's and its own prior pricing. Given AT&T's unwillingness to previously compete with Verizon on price and focus on new quad-play offers, we would expect a limited response. Needless to say, the plans are still materially more expensive than T-Mobile's recent four for $120 with 10 GB per line promotion. "
"We suspect that Verizon replaced the prior $80 for 10 GB promotion as its ability to drive gross adds waned and a larger number of current subscribers likely priced down their plans, pressuring profitability," the Jefferies analysts said.
The new plans could lead to lower net subscriber additions for Verizon but could also provide Verizon's existing customer base with better pricing. "We forecast the new plans will drive somewhat softer net add trends that will be more than offset by better underlying pricing trends for the existing base," the Jefferies analysts said.
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