Verizon Wireless (NYSE: VZ) is quietly building a major business around tablets, one that could help the carrier maintain its leading position as rivals undercut its prices and overcome its LTE coverage advantage.
Verizon's tablet strategy has become significantly clearer during the past several months, and it's definitely an important strategy. In the carrier's second quarter, Verizon reported 1.42 million retail net customer additions, of which fully 1.15 million were postpaid tablet subscribers. And Verizon isn't really alone in its reliance on tablets: AT&T Mobility (NYSE: T) reported overall postpaid net adds of 625,000 in the first quarter and 449,000 postpaid net tablet adds (the carrier reports second quarter earnings this afternoon). And Sprint (NYSE: S) in the first quarter owed virtually all of its postpaid net adds to tablet sales: The carrier's 516,000 tablet net adds in the first quarter largely offset the 747,000 phone and other net losses it reported during the period. (Sprint's free Samsung Galaxy Tab 3 promotion for new and existing customers joining the carrier's Framily plans likely helped.)
It's no surprise that tablets are helping to prop up wireless carrier customer additions. Sales of smartphones are slowing--according to comScore, fully 70 percent of Americans now own one--and carriers now are working to steal existing smartphone customers from each other. But the tablet opportunity remains largely untapped.
"We see tablet as the highly profitable growth opportunity with significant headroom in terms of further penetration. Our postpaid tablet base is only 5.4 million. So we have a great opportunity with these devices to generate growth in 2014 and beyond," Verizon Communications CFO Fran Shammo explained on the company's second-quarter earnings conference call.
The analysts at Credit Suisse agreed: "Verizon has 5.4m postpaid tablet customers compared to a total postpaid base of 98.6m," they wrote in a research note. "The company has an average of 0.15 tablets per account, compared to overall connections per account of 2.8. While tablets generate lower ARPU (average revenue per user) than smartphones, they drive higher usage per account typically resulting in migration to larger data buckets and therefore higher ARPA (average revenue per account)."
According to eMarketer, the number of Americans owning a tablet is expected to reach 147.2 million this year and grow to 171.3 million by 2018, or 52.1 percent of the population.
But what exactly is Verizon's tablet strategy, beyond selling them?
First, Verizon is discounting the cost of tablets. "Our channel checks found frequent promotions offering $100 off tablets with a 2 year contract, or at some stores, a Verizon Ellipsis or Samsung Galaxy Tab 2 for either $50 or free on a 2 year contract," wrote the Credit Suisse analysts.
"Verizon is goosing subscriber growth by practically giving away tablets, then upselling larger data packages. Clever," tweeted Currently Analysis analyst Avi Greengart.
And Verizon and other carriers are also bundling tablets with smartphones in an attempt to get customers to view a tablet almost as a smartphone accessory. For example, in May Verizon offered customers who activated a smartphone an additional $100 off the price of a new tablet. For its part, Sprint is currently offering the 16 GB iPad mini for $49.99 to customers who buy an iPhone 5s or 5c. AT&T is selling the Asus PadFone X, a smartphone/tablet combo device. And T-Mobile US (NYSE:TMUS) is giving a $100 discount to anyone who purchases an iPhone 5s and iPad Air together.
Interestingly, this smartphone-tablet bundling actually works against Sprint and T-Mobile, which don't really offer shared data. The addition of a tablet to an existing shared data account is probably easier for customers to swallow than setting up a separate service for it, which is generally how Sprint and T-Mobile have to sell tablet connections.
Second, Verizon is the only major carrier to invest in its own branded tablet device, the Ellipsis 7. The relatively mid-range Android tablet isn't anything special, but it is currently being promoted for free with a two-year contract or just $249.99 without a contract. And Verizon may have further Ellipsis plans--the carrier last year filed a trademark for a new mobile video, voice and data service under the name "ELLIPSIS."
But perhaps most importantly, Verizon is investing in network technology that will help tablet users do what they want to do most: watch video. Verizon said it will commercially launch its LTE broadcast network in 2015, enabling it to broadcast events, such as sporting events, to a large number of subscribers at the same time. The effort makes use of LTE Broadcast network technology, which Verizon calls LTE Multicast, and it makes the distribution of live video far more efficient over the wireless network than via the current unicast method--and therefore cheaper for Verizon to do.
And why is the efficient broadcast of video important? According to eMarketer, tablet users love to watch video on their tablets. The firm said tablet owners increased their daily video diet from 13 minutes in 2013 to 20 minutes this year. For smartphones, those numbers were just 9 minutes in 2013 and 13 minutes this year. "As a result of the increase in tablet video viewers, the time U.S. adults spend watching video on tablets is growing faster than on any other medium," eMarketer wrote.
- lower churn by creating more shared data connections per account;
- increase the sale of data due to tablet users' penchant for watching video;
- have plenty of runway to grow as smartphone customers pick up an extra, inexpensive tablet for their shared data account.
No wonder Verizon is interested in tablets.