Verizon's unlimited plan could cost $3B but has an upside

Smartphone millennials
Verizon is now offering an $80-a-month plan with limitless talk, text and data for both new and existing subscribers who pay automatically.

Verizon’s move to join the unlimited-data bandwagon should help it win back some customers in the first quarter, although it could prove costly in the long term. The looming question, though, is whether the nation’s largest wireless network operator can continue to cite its network as a crucial differentiator in the age of unlimited.

Last month, Verizon joined the battle over unlimited data, announcing an $80-a-month plan with limitless talk, text and data for both new and existing subscribers who pay automatically. The new offering includes some restrictions—users may be throttled after they exceed 22 GB of data in a given month, for instance—but unlike some other “unlimited” plans, it includes HD video streaming and up to 10 GB of LTE hotspot access.

The announcement marked a significant reversal for Verizon, which had long decried the wisdom of unlimited plans even as its rivals embraced them. “You cannot make money in an unlimited video world,” then-CFO Fran Shammo said in September. “You just cannot do it, because you need the cash flow to keep up with your demand.”

Verizon’s new plan came amid a flurry of unlimited-data offerings from carriers as competition in the U.S. wireless market ramped up dramatically in recent months.

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“Verizon’s decision to offer unlimited helps near-term subscriber growth and should enable it to avoid extending its two-year losing streak of customers in Q1,” Walter Piecyk of BTIG Research noted (reg. req.). “However, it does have a negative impact over the longer term, which we believe outweighs the benefits. We estimate Verizon Unlimited cost the company … $3 billion of value or 75 cents per share based on the analysis below.”

BTIG increased its estimate for Verizon’s first-quarter postpaid phone net additions by 275,000, and its full-year estimate by 500,000, which would nearly mark the break-even point for 2017. But BTIG lowered its postpaid phone ARPU for 2018 by $1, reducing its 2018 service revenue estimate by $677 million.

Verizon warned in January that its wireless service revenue wouldn’t return to growth this year, and BTIG and other analysts believe it won’t return to growth in 2018.

But analysts at MoffettNathanson research believe the new war over unlimited gives Verizon a fresh chance to leverage its network in a market where wireless connectivity is nearly becoming a commodity.

“Their new unlimited plans come at a time when the consensus narrative is that Verizon’s network is spectrum-constrained and is already nearing its capacity limits,” Craig Moffett wrote in a research note. “But Verizon’s engineers are clearly confident in their network’s preparedness. They do not appear to be betting on spectrum as the path to competitive advantage. Instead, they appear to be betting on small cells and network densification. It is here that they have begun to pull away from their competitors.”

As MoffettNathanson pointed out, AT&T is heavily focused on building a digital media empire, and Sprint is looking to leverage its significant spectrum holdings as it reins in capex as part of a larger cost-cutting effort.

“Perhaps only T-Mobile seems similarly committed to network-based competition,” Moffett wrote. “Necessity, as they say, is the mother of invention. Verizon may well have landed on a strategy that will actually work. That’s certainly not what consensus seems to be thinking.”