Verizon's New Plans – Hit or Miss?

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Mobile operators worldwide are experimenting with new pricing schemes for mobile data services as they slowly phase out unlimited mobile data plans. The top two operators in the country AT&T (NYSE: T) and Verizon Wireless have already discontinued their flat rate mobile data packages in lieu of volume-based mobile data plans to maximize revenue opportunities and manage their mobile data networks.

Verizon Wireless, a joint venture of Verizon (NYSE: VZ) and Vodafone (NASDAQ: VOD), has unveiled a shared data pricing plan that allow users to split a specific volume of data to multiple users or devices (e.g. smartphones and tablet PCs) last June 12, 2012. This approach aims to catalyze new mobile data connections from existing users by allowing them to spread out their mobile data allocation to different users or devices. The use of the new shared plan will put an end to the company's current monthly voice and data plans.

Verizon Wireless' newly unveiled "Share Everything" plan may be an innovative concept in the industry, but it's going to leave a lot of individual customers unhappy with the change. Share Everything allows new customers to share a common data plan, similar to what is offered under a family plan with shared voice minutes and text messages. The benefit comes when large families or a work group sign up for a single plan, yielding some savings. The new shared data plan, which includes unlimited voice and text, a set amount of data, and another separate fee for each device, became the new status quo starting June 28.

High access fees for each additional device make it expensive for customers who want to sign up multiple gadgets under one plan. The access fee for a smartphone is $40 a month, while a basic phone charges $30, and laptops, Netbooks, and mobile hotspots are $20 ($10 for a tablet). In a nutshell, all devices in a family will have unlimited voice minutes and text messaging. Verizon Wireless is pricing 1GB of data in $10 increments, so there's a $50 a month plan for 1 GB and $100 for 10 GB. Current users that have an unlimited data plan and are using data services more with Verizon Wireless for $30 a month will want to hold on to their mobile plan forever. The new shared data plan will charge $90 per month for one smartphone and 1 GB data. As a result, the Share Everything price is lower than the currently offered plans when chosen with unlimited voice calls and text messaging, but higher than plans with limited calling and texting.

AT&T is expected to make a similar offer in the coming months. Sprint Nextel (NYSE: S) and T-Mobile USA, the third and fourth largest wireless provider respectively, are rumored to be against shared data plans. Sprint Nextel is still sticking to its unlimited data plans and does not have any intention to launch shared data pricing plans in the short term. It believes that "the concept of sharing a monthly data allowance across a family of devices significantly increases the potential of a surprise monthly bill due to data overage charges and driving greater customer dissatisfaction," while a T-Mobile USA executive wrote in the operators' blog: "Do families really want to keep track of each other's data consumption? We don't think so; just imagine mom's email is suddenly unavailable because her teenage son watched an HD movie on his phone, consuming the family's data allotment."

Prepaid wireless carriers such as MetroPCS (PCS) and Leap Wireless (LEAP) are more at risk as they also offer unlimited pricing plans.

The goal of Verizon Wireless' shared data plans is to align revenue with its network investment, which will eventually improve the wireless operators' return on invested capital (ROIC). Verizon made voice and texting unlimited since they were both in decline, especially with some users using mobile applications like Skype and Whatsapp messenger for free. Skype is a mobile application owned by Microsoft (MSFT) which uses the internet to make calls, while Whatsapp messenger is a mobile application that uses the internet to send and receive messages. Instead, Verizon will charge by the data usage, which will translate to revenue growth.

With Verizon and AT&T heavily investing in Long Term Evolution (LTE) or 4G wireless technologies, both have to devise a plan that will create a faster turnaround on capital expenditures (capex). In other words, Verizon Wireless and AT&T need to keep data service profitable since they cashed out a lot of investments in building their networks. I believe the new pricing plan is better aligned with Verizon Wireless' actual network operational expenditure (opex) and capex.

The market's reaction to the planned changes in Verizon Wireless' has been positive for the past few days, increasing Verizon Communications' share by more than a dollar to $44 within two days of the announcement. Its stock is currently at its 52-week high with a range from $32.28 to $44.06. It has a price to earnings ratio of 47, and a market capitalization of $125 billion. It pays a steady annual dividend rate of $2 per share on quarterly installments; its most recent ex-dividend date was July 6. It has 2.84 billion shares outstanding and a trailing 12-month (TTM) revenue of $112 billion, creating revenue per share of $39.54. Its latest quarterly revenue grew by 4.6% against the same period last year, showing a quarterly earnings growth of 17.2% year-on-year.

Vodafone, on the other hand, just closed at $27. It has a market capitalization of $137.4 billion and an enterprise value of around $178.5 billion. The company has a price to earnings ratio of around 13. Its payout ratio is 94%, and it has a five year average dividend yield of 3.4%. Its operating cash flow is around $20 billion and is expected to raise in the future.

The new plan protects Verizon Wireless from alternative voice messaging options that run over the Internet like Whatsapp and Skype. The plans include unlimited voice and text messaging, which is seen to have a declining usage, for a fixed fee while they charge for incremental data use, which is expected to increase heavily in the future. With these in mind, I expect the average revenue per user (ARPU) to rise with increased data usage. Operation wise, the plans act as a retention mechanism; as customers add multiple devices and users, it becomes less likely that they will churn.

Although the new plans have conjured mixed reactions from users, analysts are excited about how this new scheme will affect the telecommunication market. I would suggest holding onto your Verizon or Vodafone shares, and possibly increasing your positions. The pricing scheme will most likely generate higher revenue and lower churn for Verizon Wireless.

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