Verizon and MetroPCS have the same LTE adoption rate - why?

The juiciest bit of news to come out of a recent appearance by MetroPCS' (NASDAQ:PCS) Keith Terreri was that the flat-rate carrier now counts 500,000 LTE subscribers out of 9.34 million total. That adoption rate--5.35 percent--is pretty much identical to the 5 percent of Verizon Wireless (NYSE:VZ) users on LTE, a stat Verizon Communications CFO Fran Shammo disclosed in late February. 

How can it be that Verizon, which has a much larger, faster LTE network and a wider LTE device selection than MetroPCS (along with a much larger marketing budget), has roughly the same adoption? And should that worry Verizon?

Despite being the first U.S. carrier to launch LTE, in September 2010, the reasons for MetroPCS' low LTE adoption rate seem pretty clear. The company's LTE network is relatively small--it's only available in the carrier's 14 core markets. The company has also deployed LTE in a 5X5 MHz configuration in AWS spectrum, meaning its network has slimmer channels and therefore slower download speeds than Verizon's. Additionally, MetroPCS' LTE devices have so far been expensive, since it doesn't subsidize the cost of its devices. The Samsung Galaxy Attain 4G costs $219 while the LG Connect 4G and LG esteem retail for $319--significantly more than the company's non-LTE Android phones. MetroPCS is banking on LTE smartphones in the $99 to $149 range in the second half of this year to boost adoption.

But why is Verizon's LTE adoption rate the same as that of MetroPCS? First, when Verizon first launched LTE in December 2010, it did not have any LTE smartphones. So customers who signed two-year contracts before Verizon's first LTE smartphone, the HTC ThunderBolt, went on sale in March 2011 could not easily switch to an LTE device. Verizon was also still selling non-LTE smartphones. Moreover, the carrier's first LTE smartphones were expensive and their batteries didn't last long. Early adopters signed up, but not that many. The company added 500,000 LTE devices in the first quarter of 2011, 1.2 million in the second quarter and 1.4 million in the third quarter. Furthermore, although Verizon has rapidly expanded its LTE network to cover more than 200 million POPs (en route to 260 million by year-end), Verizon's four LTE service outages in 2011 (including three in December) likely didn't help its cause in the popular consciousness.

It wasn't until Verizon launched its promotion in the fourth quarter to double customers' data allowance--from 2 GB to 4 GB for the same $30--that adoption soared. Verizon also in the fourth quarter had a wider and deeper selection of LTE smartphones from the likes of HTC, LG, Motorola Mobility (NYSE:MMI) and Samsung, as well as cheaper LTE smartphones like the Partech Breakout. All of this contributed to Verizon notching 2.3 million LTE device activations in the fourth quarter, including 1.6 million LTE smartphones. 

Despite its gains in LTE subscribers, Verizon is clearly hoping for faster LTE adoption. Its advertising for its LTE network is seemingly ubiquitous. The company has extended its double-LTE data promotion through the first quarter. And earlier this week Verizon sent out offers for a free Samsung Droid Charge--one of its earliest LTE smartphones--if customers sign up by March 31. Clearly, Verizon wants to goose its LTE numbers as much as possible.

Indeed, Guggenheim Securities analyst Shing Yin pointed out recently that Sprint Nextel (NYSE:S) added more WiMAX customers last year than Verizon did LTE customers. Verizon clearly wants to change that.

And Verizon and other carriers should want to migrate as many customers as possible to LTE. Customers get faster speeds and more capabilities. Carriers get a more efficient network and the chance to refarm legacy spectrum at some point in the future. But to move a critical mass of subscribers to LTE, networks need to get built out further, device prices need to fall and carriers have to entice customers to adopt. An LTE iPhone may also help move the needle.

For Verizon specifically, the carrier isn't leaving much to chance--the company has said all of the smartphones it introduces this year will be LTE-capable.

The fact that Verizon and MetroPCS' LTE adoption rates are basically the same isn't surprising, at this point. But those rates will probably begin to move significantly this year. --Phil