Although the No. 3 and No. 4 carriers --T-Mobile and Sprint --still offer unlimited data options with their smartphone contracts, Verizon and AT&T -- the two largest carriers, respectively -- no longer offer this option. However, both companies still have unlimited-data customers who are grandfathered in under prior contracts. If you think this has been a mutually beneficial and amicable arrangement as Verizon keeps long-term subscribers happy with its great deal, then you'd be mostly wrong.
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Instead, the relationship has been mostly contentious. Verizon and AT&T are reluctantly continuing to honor the unlimited pledge it made with these consumers (see: network optimization policies), and these grandfathered customers are wary of any change of terms and service updates. Perhaps these customers are a bit paranoid, but it seems they have a valid basis of being so, especially Verizon subscribers.
Bye bye subsidy, hello price increasesInterestingly enough, earlier this year, Verizon took a page out of T-Mobile's playbook, and essentially trashed its two-year contracts -- and more importantly, device subsidies. To make up for the loss of this powerful inducement, Verizon lowered its monthly service costs. New subscribers are able to pay the full cost of the device and switch carriers at will, or essentially buy or lease a phone on a monthly basis and switch once the lease is finished, or the device is paid off in full.
According to The Verge, starting in November the company will increase the cost of its unlimited data plans by $20, to $49.99 per line, an increase of 67%. This will impact Verizon's unlimited-data consumers who are on month-to-month plans. For those unlimited-data users still on a contract, however, Verizon will continue to honor existing arrangements. The move makes it clear, Verizon wants users to pay-up for or opt-out of unlimited data plans.
Verizon needs to monetize its networkThis is the conundrum Verizon is in. Unlike AT&T, Verizon didn't own its wireless network entirely. In 1999, before the full value of mobile networks were known or even conceptualized, Verizon formed a joint partnership with Vodafone,with Verizon taking 55% of the business line. In late 2013, Verizon agreed to pay $130 billion in a combination of cash, stock, and business transfers to pay for the acquisition. In the process, Verizon issued $49 billion in debt to fund the transactions -- the largest corporate debt offering ever.
However, that may have been the absolute worst time for Verizon to buy its wireless division outright, at least on a valuation basis. Although subscriber growth had already started to slow, it appeared Verizon was counting on increased margin expansion -- read: higher average revenue per account -- to justify this buyout. Unfortunately, since the third quarter of 2013, that really hasn't materialized.
For example, Verizon's important postpaid account figures show roughly 9% connection growth during the last two years. This figure has held up well on a comparative basis, but the average revenue per account has dropped a little under 1% during this same time frame. If you remember, T-Mobile scrapped device subsidies earlier that year, and the company started to grow market share and pressure prices later that year.
While it's understandable that Verizon would want to more effectively monetize its users and grow that ARPU figure, these unlimited-data users comprise "less than 1%" of its total subscriber costs, so the ARPU improvement should be inconsequential. However, this could increase Verizon's enviable churn percentage in the fourth quarter if many of those unlimited users move to Sprint or T-Mobile.
The article Verizon Unlimited-Data Users Should Brace for a Price Increase originally appeared on Fool.com.
Jamal Carnette owns shares of AT&T and Sprint. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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