Verizon’s Service segment is under pressure
The Wireless division of Verizon Communications (VZ) is made up primarily of the Service and Equipment segments. The Service segment provides voice and data services to customers who subscribe to its various wireless plans. The Equipment segment deals with the sale of wireless devices such as smartphones and tablets. Notably, while the Service segment provides more than half of Verizon’s revenues, both the Service and Equipment segments’ revenues fell last quarter on a YoY (year-over-year) basis.
Verizon expects the pressure on its Service segment to continue for the next few quarters, given the continual migration of customers opting for unsubsidized plans. Unsubsidized plans are plans wherein customers can either bring in their own devices or pay for devices in monthly installments. Last quarter, 53% of postpaid phone customers were on unsubsidized plans.
Verizon expects Service growth to return by 4Q17
Verizon stated that as the penetration of unsubsidized plans continues to increase beyond 50%, its YoY declines in Service revenues should slow. We’ve already begun to see some improvements in this effort. The company’s YoY decline improved from 6.2% in 1Q16 to 5.4% in 2Q16. Verizon now expects positive growth in its Service segment to return by 4Q17.
But although Verizon expects the positive growth to return, in the short term, the improvement could be short-lived. Verizon recently increased the pricing of its wireless plans by $5–$10, though these plans come with higher data allowances. It appears that Verizon is following the lead of T-Mobile (TMUS), which increased its pricing late last year. But Verizon faces tough competition from the likes of AT&T (T) and especially Sprint (S), which is using price cuts as an aggressive way to gain subscribers.
In the next part, we’ll look at Verizon’s growth drivers.