Video Junkies Test Verizon Commitment to Data Usage Limits
(Bloomberg) -- Robert Castle of Eagan, Minnesota, and his family of four dropped their $275-a-month wireless service with Verizon Communications Inc. in July and switched to a $120 plan from T-Mobile US Inc.
“We are big video watchers and T-Mobile’s Binge On plan lets you watch for free,” said Castle, a 12-year Verizon customer who made the switch even though he said Verizon had better service. “It’s amazing when you don’t have to worry about running over your data limit.”
It may become harder for Verizon to hold onto such lucrative family-plan customers, who tend to be more loyal than single-line users and pay up to connect phones, tablets, Wi-Fi hot spots and even cars. T-Mobile, which bills itself as the “un-carrier,” and Sprint Corp. recently introduced unlimited data plans to win over these families, many of which are anxious about running up big tabs watching videos on YouTube, Snapchat and Netflix.
As the top-rated wireless service in the U.S., according to Rootmetrics, Verizon has opted to compete on network quality, refusing to offer unlimited data. Instead, the company sells a finite amount of data spread across a family’s phone lines. For instance, Verizon is now promoting a $160 plan for four lines that includes 20 gigabytes of shared data -- enough to stream more than 80 hours of standard-definition video.
While Verizon has twice as many monthly subscribers as its smaller rivals, it’s vulnerable to competitors’ all-you-can-eat plans ahead of the busy holiday season and the arrival of Apple Inc.’s iPhone 7 on Friday. Sprint and T-Mobile reported Tuesday that pre-orders for the new model were about four times higher than past years. AT&T Inc. said volume had surpassed year-earlier levels.
Verizon Chief Financial Officer Fran Shammo has reiterated the company’s policy to stand its ground, telling investors last month that the carrier is willing to watch rivals go down the unlimited data path rather than follow them.
“Verizon believes in the long game, and they will watch to see how this unlimited offer affects T-Mobile,” said Kevin Roe of Roe Equity Research. “But I don’t think investors like the take-the-punches approach.”
Both Verizon and AT&T have revamped prices and policies on data limits. Now, instead of adding charges when users go over their data limits, the companies will throttle, or slow down data speeds. Verizon added a $5-a-month insurance plan, or safe mode, that lets users avoid $15 overage fees.
With Sprint’s “half-off” promotions and T-Mobile’s introduction of new features and giveaways every month or two, Verizon has been falling out of step, taking as long as 12 to 18 months to create new pricing strategies, Roe said.
“They need a shorter reaction time, like every six to eight months,” Roe said. “For example, their move to eliminate overages was way too slow.”
T-Mobile has also embraced social media, which has become a showcase for its engagement with customers, more so than its bigger rivals. Users including Castle have tweeted T-Mobile Chief Executive Officer John Legere and received replies. Castle said he wouldn’t have switched as readily to T-Mobile had Verizon been more responsive to his inquiries and worked with him.
“When we tried to get a better plan Verizon never acquiesced on price and they wanted me to sign a new contract, which wasn’t even a great deal,” Castle said.
Price is only part of it, said Kelly Crummey, a company spokeswoman. Verizon provides a great network at a great value, she said. Price-cutting is a sign of weakness, according to Chief Executive Officer Lowell McAdam. “If you need to sell your product at half of what Verizon sells theirs, that’s proof alone that networks matter,” he said on an earnings call in July.
Emily Edmonds, an AT&T spokeswoman, declined to comment.
As younger generations view more video on phones, unlimited plans start to look more attractive, forcing parents to explore cheaper options for their families, said Amy Yong, an analyst with Macquarie Capital USA Inc.
“If T-Mobile starts to gain traction on family plans, that could shake things up a bit,” Yong said.
Verizon can’t afford to ignore the competitive threat because the mobile business accounts for almost all of its profit. In the second quarter, it contributed more than 90 percent of total earnings before interest, taxes, depreciation and amortization.
In fact, the price battles and sluggish growth of Verizon’s maturing wireless business have led it to focus on augmenting mobile with new ventures. Over the past three years, Verizon has introduced the mobile video-streaming service go90 and made deals to acquire AOL Inc. and Yahoo Inc. to expand into mobile media and advertising. The company is also pushing further into connected vehicle technology with the pending $2.4 billion purchase of GPS-tracking specialist Fleetmatics Group Plc.
Verizon’s decision not to sully itself in a price battle, even if it means losing some customers, still helps reinforce the company’s image as a premium carrier, said Roger Entner, an analyst at Recon Analytics LLC.
“The problem is if you follow what everyone else is doing, you don’t look like a leader, you look bad,” Entner said. “If you are Verizon, you have to be the best carrier with the best customer service and the best network. You have to be the Ferrari of the wireless world.”