For the first time ever, Verizon Wireless (NYSE: VZ) in the first quarter recorded a net loss of handset subscribers. During a quarter when AT&T Mobility (NYSE: T) netted 176,000 new phone subscribers and T-Mobile US (NYSE:TMUS) posted a whopping 1.256 million new phone subscribers, the analysts at New Street Research pointed out that Verizon lost 156,000 phone subscribers. Although Verizon managed to juice its first quarter net additions into positive territory with tablets and other devices, the carrier nonetheless suffered a serious setback.
What's perhaps more concerning is that Verizon executives don't appear to be worried: In a meeting with analysts following the release of its first-quarter results, Verizon executives said the company "will remain rational on price and strategic initiatives with a focus to compete based on network quality and reliability," according to Credit Suisse.
Meaning, it seems that Verizon plans to continue to sell expensive two-year service contracts by advertising the reliability and breadth of its network--the same strategy it has maintained for years now. To be clear, it's a strategy that has paid off handsomely for the carrier, giving its enviable margins and relatively consistent growth.
But the wireless market is shifting, thanks in large part to the efforts of John Legere's "uncarrier." T-Mobile last year ditched handset subsidies in favor of handset financing programs. That shift, coupled with T-Mobile's more recent moves like eliminating international roaming charges, have catapulted T-Mobile into a magenta-hued limelight. Customers have shown--very clearly--that they don't like inflexible two-year contracts, unreasonably high bills and unexpected expenses.
So far T-Mobile has focused much of its competitive efforts against AT&T, but in the first quarter AT&T showed itself capable of a surprisingly nimble response: AT&T reported 625,000 postpaid subscriber net additions in the first quarter, almost triple what analysts had expected.
Perhaps more importantly, AT&T's price cuts at the beginning of the first quarter appeared to draw blood not from T-Mobile or Sprint (NYSE: S) but from Verizon. AT&T in early February cut 20 percent off the cost of some of its higher-end plans, allowing it to sell four smartphones with unlimited voice, texting and 10 GB of data for $160 per month instead of $200. It's that offer that appears to have cut into Verizon's first quarter performance; Verizon cut its prices to exactly match those of AT&T right at the end of the first quarter. (That price point appears to be so powerful that even C Spire Wireless today cut its prices to match it.)
"While the loss of basic and 3G devices indicates that T-Mobile's ETF reimbursements had strong traction, we believe the company also saw pressure from AT&T's 10GB pricing," wrote analysts at Credit Suisse in a review of Verizon's first quarter performance. "Verizon quickly responded, plugging a potential crack in the dam, but we have now seen that the company is vulnerable to competition."
Verizon is also trailing AT&T in terms of handset financing. According to New Street Research, fully 25 percent of AT&T's postpaid subscriber base is now on its Next handset upgrade program, while only 2 percent of Verizon's postpaid subscriber base is on the carrier's Edge program. Although Verizon executives have predicted growth in Edge subscribers, the carrier is clearly taking a tentative approach to the area.
During the carrier's quarterly conference call, T-Mobile's Legere highlighted what he sees as his rivals' inability to understand the changes happening in the market. He said most competitive responses "are still time-based, one-off responses to us as opposed to structural changes in the way they serve their customers." He added that "it's a strange period where they can't believe that they can't just switch and change the environment."
The bottom line is that Verizon has long chased high-value customers with the promise of an extensive, dependable network. But Sprint, AT&T and T-Mobile continue to chip away at Verizon's network claims--Sprint has "America's Newest Network," AT&T claims the "nation's most reliable 4G LTE network," and T-Mobile has the "fastest nationwide 4G LTE network." And T-Mobile has shown that it can acquire high-value customers with innovative pricing scenarios: "Customer quality continues to be very strong," Legere proclaimed on the company's quarterly conference call. "Customers are signing up for more data, paying their bills and staying with us longer."
According to analysts with Jefferies, the first quarter of 2014 marked the industry's return to growth in terms of postpaid handset net additions. Unlike the first quarter of 2012 when the nation's top carriers lost a combined 362,000 subscribers, and the first quarter of 2013 when the nation's top carriers lost a combined 505,000 subscribers, in the first quarter of 2014 the nation's top carriers added a total of 428,000 subscribers. But Verizon was largely absent from the game.
It's clear that Verizon isn't facing the kinds of serious, endemic troubles that Sprint and U.S. Cellular (NYSE:USM) are. However, Verizon shouldn't base its whole strategy on slowly reacting to competitive threats. The game is changing, and Verizon should consider becoming proactive as a result. --Mike | +MikeDano | @mikeddano