Verizon Is Finally Paying Attention to This Valuable Market

By Adam Levy Markets Fool.com


Image Source: Verizon.

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Competition in the wireless industry has never been more fierce. T-Mobile (NASDAQ: TMUS), specifically, is putting tons of pressure on the prices of bigger players Verizon (NYSE: VZ) and AT&T(NYSE: T)and stealing millions of customers away from them.

One area where AT&T has been able to stymie its losses is in prepaid customers. Unlike postpaid customers, prepaid customers pay for services before they receive them. These customers are generally considered lower value with less creditworthiness and lower average revenue. But with the removal of two-year contracts, phone subsidies, and early termination fees (your new carrier will take care of them for you), prepaid customers are starting to look an awful lot like postpaid customers.

Cricket Wireless -- AT&T's prepaid brand -- saw subscribers climb by 2 million over the past year.On the other hand, Verizon has largely ignored that market, losing thousands of subscribers. That is at least until recently.

New reports indicate that Verizon is experimenting with new retail locations exclusively offering prepaid plans. Additionally, it revamped its prepaid pricing in the third quarter and started putting more marketing dollars toward its prepaid service. The result was a turnaround in prepaid net adds, and investors should expect continued success going forward.

Don't fear cannibalization

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Verizon ended the third quarter with less than 5.5 million prepaid customers. By comparison, AT&T has 13 million and T-Mobile has over 19 million. Verizon may be the largest consumer mobile carrier, but it's one of the smallest prepaid service providers.

There's a reason for that, too. During Verizon's first-quarter earnings call last year, CFO Fran Shammo told analysts, "We're really not competitive in that environment for a whole host of reasons and it's because we have to make sure that we don't migrate our high-quality postpaid base over to a prepaid product." In other words, Verizon was worried that providing a good value to prepaid customers would cannibalize its highly profitable postpaid business.

Instead, Verizon started losing customers to lower-cost competitors like T-Mobile. Through the first half of 2016, Verizon added a total of 78,000 postpaid phone subscribers, down from 183,000 postpaid phone net adds in the first half of 2015.

When Verizon finally started paying attention to prepaid in the third quarter, it saw some cannibalization. It lost 36,000 postpaid phone subscribers that quarter, but it added 83,000 prepaid subscribers. CFO Fran Shammo says Verizon saw double the amount of postpaid subscribers move over to prepaid from postpaid in the third quarter, and those converters "accounted for a little less than 50% of our prepaid net adds." Still, it's better than losing them.

Considering Verizon's new prepaid plans, which start at $50 per month and offer similar revenue per subscriber as its postpaid plans (albeit with larger data allotments), the cannibalization is mostly a wash.

Using physical locations to market prepaid

Verizon's next step to penetrate the prepaid market is to establish more physical locations in areas better served by prepaid plans. It's already starting to experiment with such stores in Las Vegas and Phoenix, according to a report from FierceWireless.

T-Mobile's MetroPCS already has around 8,500 stores. Cricket Wireless has 3,349 stores.

Building out more physical storefronts dedicated to prepaid service will help Verizon penetrate the market, especially with its new high-value prepaid options. It also needs to do a good job advertising those prepaid options to the markets it's serving with those physical locations. That's how Verizon will continue to grow its prepaid market share. And as mentioned above, a little bit of cannibalization isn't going to hurt it nearly as much as losing customers entirely.

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Adam Levy owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.