Verizon faces pricing pressure from its competition
In the earlier parts of this series, we learned that Verizon (VZ) faced stiff competition from other national wireless carriers in 4Q14. We also learned that the national carriers, including Verizon, AT&T (T), Sprint (S), and T-Mobile (TMUS), increased their promotional activities to attract and retain customers during the quarter. These offers included lower unit pricing on data plans.
Like other carriers, Verizon also increased the data limits on its existing plans. Here, we’ll look at a key factor that may have helped the company manage its profitability—at least to some extent—despite this price competition.
Rising LTE penetration decreases unit data costs
Verizon’s 4G LTE (long-term evolution) penetration rates increased both sequentially and year-over-year in 4Q14. As you can see in the chart above, the proportion of LTE devices in the company’s postpaid connections has evenly increased each quarter from ~44.1% in 4Q13 to ~66% in 4Q14.
Customers on the LTE network are more beneficial to wireless telecommunication companies than customers on the 3G network. LTE device users often use more data than 3G customers. Also, wireless telecommunication companies bear much lower unit costs for data on the LTE network compared to 3G.
According to Lowell McAdam—Verizon’s CEO and chairman—LTE is more cost-efficient than 3G. The company’s network efficiency increased by eight times while its network migrated from 3G to 4G. McAdam discussed this development at the Citi Global Internet, Media & Telecommunications Conference held on January 6, 2015.
This increased efficiency is particularly significant for Verizon, considering that the LTE network was catering to ~84% of its total data traffic in 4Q14.
If you want to take on diversified exposure to Verizon, you can invest in the Technology Select Sector SPDR Fund (XLK). The ETF held ~5% in the company on March 19, 2015.
You can also take on more diversified exposure to Verizon by investing in the iShares Russell 1000 Growth ETF (IWF). This ETF held ~1.8% in the company on the same date.