Editor's Corner—Can Verizon's network meet demand in the era of unlimited?

Verizon recently rejoined the unlimited bandwagon
Verizon's overhauled plans have raised questions about the capacity of its network.

Colin Gibbs Editor's Corner

Verizon’s move to overhaul its so-called unlimited data plan is a clear indication that the carrier’s network was truly struggling under the strain of a significant increase in traffic. What the carrier plans to do to increase capacity, though, is less clear.

The country’s No. 1 wireless carrier is making some major changes to the $80-a-month unlimited plan it introduced just six months ago, dividing it into three tiers and capping video transmission speeds to lighten the network load. A basic plan starts at $75 a month for a single line but caps video streaming at 480p on smartphones and 720p on tablets, and enables the operator to reduce speeds at any time if the network is congested.

A second plan starts at $85 a month, reducing speeds at peak times for users once they’ve surpassed 22 GB in a billing cycle, and limiting video streaming to 720p on smartphones and 1080p on tablets.

At first glance, the move appears to lend some credence to former Verizon CFO Fran Shammo, who repeatedly insisted that “You cannot make money in an unlimited video world.” Indeed, Verizon was essentially dragged kicking and screaming into the unlimited game, acquiescing only after bleeding customers to unlimited plans from T-Mobile and Sprint.

Playing a forced hand

And joining the unlimited bandwagon has come at a cost for Verizon, as the rise in data traffic appears to have taken a toll on its network. T-Mobile cited a report from Ookla last month indicating data speeds on the networks of both Verizon and AT&T had slowed since both operators launched unlimited data plans.

But the new plans may actually enable Verizon to increase revenues even as it lightens the network load, Walter Piecyk of BTIG Research said.

“Verizon effectively increased pricing on its unlimited rate plan, providing further evidence that the wireless market is not as competitive as many investors believe,” Piecyk wrote on BTIG’s blog. “Verizon also introduced a new lower-end rate plan that prioritizes data traffic depending on the customer’s rate plan. These changes could help alleviate network congestion, but also sets up a new scheme by which Verizon can drive higher ARPU through tiered levels of wireless pricing.”

Wells Fargo senior analyst Jennifer Fritzsche went a step further, observing that Verizon’s cheapest new unlimited plan—which isn’t really unlimited, of course—might increase the carrier’s appeal to budget-conscious smartphone owners who might be more inclined to use T-Mobile or Sprint.

“By introducing an unlimited ‘light’ plan, we believe (Verizon) will be better able to target segments which T-Mobile and Sprint are going after,” Fritzsche wrote in a note to investors. “While this plan is still $10 to $20+ a month above Sprint’s and T-Mobile’s unlimited plans, it offers Verizon more of a growth segment to pursue.”

RELATED: In 2017, how much low-, mid- and high-band spectrum do Verizon, AT&T, T-Mobile, Sprint and Dish own, and where?

But wireless traffic in the United States will only continue to soar in the coming years as 5G comes to market and the number of connected devices grows rapidly. Verizon’s throttling strategy and price increase may alleviate network concerns in the short term, but—like all of its competitors—it must find ways to increase capacity in the long term.

Buying time to densify its network?

Notably, Verizon walked away empty-handed from the FCC’s incentive auction of MHz spectrum earlier this year, and it has little spectrum left to refarm from CDMA to LTE, Piecyk said. The carrier’s licenses for millimeter-wave holdings will increase significantly if it finally closes on its $3.1 billion acquisition of Straight Path, but that deal continues to face regulatory hurdles.

So Verizon will have to continue to use small cells to densify its network and may have to make another acquisition to meet demand in the era of unlimited data.

“The other obvious, and probably more important, takeaway from Verizon’s new rate plans is to once again raise questions about the state of Verizon’s network. (Earlier this month, we profiled how Verizon converted additional spectrum from CDMA to LTE, leaving it with only 20 MHz left to convert in this important market),” Piecyk wrote. “It’s unclear why Verizon remains resistant to a Dish spectrum acquisition given the slow pace of small cell deployments. Perhaps increased pricing and more throttling can buy Verizon more time to deploy the small cells that are needed to sustain network quality.” — Colin | @colin_gibbs