Analyzing Verizon's growth opportunities and important risks

Part 2
Analyzing Verizon's growth opportunities and important risks (Part 2 of 6)

Why Verizon’s new smartphone lineup is helping the company

The popularity of new smartphones and tablets holds high importance for telecom providers

Typically, U.S. telecom providers sell smartphones at a highly subsidized price in lieu of a two-year contract. For example, you can buy an Apple (AAPL) iPhone 5S for about $200 from Verizon (VZ), AT&T (T), and Sprint (S) in lieu of a two-year contract, whereas its actual price without a contract exceeds $600. Although telecom providers take a loss on smartphone sales, they make up for the loss from higher monthly subscription plans locked in for two years. Contractual plans also help carriers maintain customer stickiness and maintain low churn rates, as breaking the contract before the two years end means a high penalty. As the chart below shows, Gartner expects smartphone sales to increase from 1.0 billion in 2013 to 1.2 billion in 2014 and then to 1.7 billion in 2018, at a CAGR (compound average growth rate) of 12%.

Smartphone Sales ForecastEnlarge Graph

A look at Verizon’s new line of smartphones and tablets 

Verizon is focused on enhancing its high speed 4G LTE smartphone lineup. In Q1 2014, Verizon launched the Nokia (NOK) Lumia Icon and HTC One (M8) smartphone. The company also launched a few tablets, such as Google’s (GOOG) Nexus 7, LG’s G Pad  8.3 LTE, Samsung’s Galaxy Note Pro, and Samsung’s Galaxy Note 10.1 2014 edition. Recently, Verizon also launched new smartphones, such as Samsung’s Galaxy S5 and ATIV SE, the Lucid 3 by LG, and the DROID MAXX by Motorola.

New smartphone plans help boost Verizon

Until last year, the subscriber could either enter into a two-year contract to get subsidized smartphones or pay the full upfront cost of the smartphone if they didn’t want to enter into a contract. However, if the customer wanted to upgrade their phones more frequently, there wasn’t much choice left. To meet this need, Verizon introduced the EDGE plan last year, which is an installment plan for customers who want to upgrade their devices faster or who don’t want to pay the upfront cost of their devices. Under this plan, users can upgrade their smartphones if they pay 50% of the retail cost of their smartphone in as soon as six months. These plans are good for Verizon also, as it doesn’t pay the cost of the subsidy, and the customer bears the entire cost of the smartphone.

The Realist Discussions