Analysts: Verizon's new price cuts indicate willingness to take on Sprint, T-Mobile

Verizon Wireless' (NYSE: VZ) decision to cut pricing on most of its More Everything shared data plans by $10 is an indication that the carrier is going to be more willing to compete directly with Sprint (NYSE: S) and T-Mobile US (NYSE:TMUS) and is less concerned with rival AT&T Mobility (NYSE: T), according to financial analysts. Additionally, Verizon's promotion to cut the monthly access charge of many customers who use its Edge equipment installment plan could be a way to spur Edge adoption and improve EBITDA, according to one analyst.

Under its new pricing, Verizon hiked the price of its 10 GB shared plan from $80 up to $100, matching AT&T (which had not lowered pricing). Yet Verizon also cut pricing on many other plans. On plans with data allowances between 500 MB and 6 GB, Verizon cut prices by $10. The carrier lowered pricing by $5 for its 8 GB plan.

"We believe that today's plan change signals a shift in strategy, from targeting AT&T on 1 GB and higher plans, to competing more aggressively with Sprint and T-Mobile on single line and lower-end 2-line family plans," Jefferies analysts Mike McCormack, Scott Goldman and Tudor Mustata wrote in a research note. "While the plan changes could pressure [average revenue per account] trends, we also believe investors could be concerned with the company's increased willingness to compete head-to-head with the two value carriers."

The Jefferies analysts noted that for single-line customers the plan changes "nearly eliminates the discount between Verizon's More Everything and single line plans, while offering more features to customers." Indeed, Verizon's single-line plans offer unlimited voice, texting and 1 GB of data for $60 per month, compared to the new $70 1 GB More Everything plan with one smartphone. The More Everything plan has features like 25 GB of cloud storage, international messaging and mobile hotspot service.

Verizon's 3 GB plan with Verizon Edge is $75, $10 more than to AT&T's single-line $65 3 GB Mobile Share Value plan. The 3 GB Verizon plan is also still more expensive than most Sprint and T-Mobile offers, Jefferies noted.

However, the situation is different for two-line family plans. When combining Verizon's new pricing with its limited time offer to discount access fees, pricing for Verizon's 6 GB plan is $100, matching Sprint and T-Mobile's price points for two-line unlimited data plans. AT&T's comparable 6 GB family plan is $120 per month.

Despite all of this, Jefferies does not think Verizon's offerings will force a major response from AT&T, aside from perhaps a 6 GB plan promotion. "AT&T also has flexibility in offering lower monthly price points by offering different tenure equipment installment plans," they wrote. "For example, while Verizon only offers a 24-month tenure installment plan, AT&T also offers a 30-month plan, that nets out to ~$5/month lower pricing. Furthermore, we believe the company is accustomed to low-end subscriber losses to T-Mobile, and is disinterested in further propagating a price war."

While Verizon's rate costs are unlikely to meaningfully pressure Verizon's ARPA trends and are likely already embedded in its guidance, the Jefferies analyst wrote that "investors could be concerned with the willingness to compete head-to-head with T-Mobile and Sprint in a usually quieter subscriber quarter. Ultimately we would prefer better margins over low-end subscriber gains."

Meanwhile, according to BTIG analyst Walter Piecyk, the more interesting element of Verizon's announcement was the price cut to the monthly smartphone line charge for customers using Verizon Edge. Customers who choose a More Everything plan of 6 GB or higher and use Edge get a $25 discount per smartphone per month, while customers on plans of 4 GB or less get a $15 discount.

"While the price cut on the monthly line fee could simply be a way to target customers from AT&T or Sprint, we think it might also be a test to try and move a greater mix of customers to Edge phone payment plans," Piecyk wrote in a blog post. "Verizon customers can only benefit from this lower monthly service rate if they move over to the Edge phone payment plan."

In the fourth quarter, Verizon said around 25 percent of all of its phone activations were completed through its Edge program, up from 12 percent in the third quarter. This was despite the fact that Verizon had 9.8 percent of its postpaid base upgrade in the fourth quarter, compared to 7.4 percent in the year-ago period. By comparison, AT&T said 58 percent of its smartphone activations were on its Next equipment installment plan (EIP), and Sprint reported a comparable figure of 46 percent for the fourth quarter. T-Mobile's Simple Choice plans are all on the EIP model.

Verizon saw its wireless segment EBITDA margin on service revenues drop to 42 percent in the fourth quarter from 47 percent a year ago. Piecyk noted that AT&T, which has been pushing its Next plan more aggressively, kept its margins stable from the same period in the prior year despite the spike in its phone upgrade rate to 11.5 percent from 8.6 percent last year.

"It's hard to know what impact this promotion will have on Verizon's Edge phone payment program but it could be an early [indication] that they will be more willing to embrace this EBITDA- friendly strategy in 2015 as they face persistent competitive pressures," Piecyk added. He wrote that Apple (NASDAQ: AAPL) could be a beneficiary if Verizon customers decide to upgrade their existing iPhones earlier than expected in order to benefit from the carrier's lower service pricing. 

For more:
- see this BTIG blog post (reg. req.)

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