Verizon (NYSE:VZ), the largest U.S. wireless carrier, announced that it would reintroduce an unlimited wireless data plan. While the move marks a reversal of sorts from Verizon's recent strategy of getting subscribers to pay for data based on their actual usage and raising base pricing on certain plans, it could help the carrier take on smaller rivals such as Sprint (NYSE:S) and T-Mobile (NASDAQ:TMUS), who have made unlimited data a centerpiece of their subscriber acquisition strategy in recent quarters. The new plan is priced at an "introductory" $80 per month for a single line or $45 per line for four lines. Below we take a look at the potential rationale for Verizon's move and how it could impact the carrier.
We have a price estimate of $55 for Verizon's stock, which is 15% ahead of the current market price.
Carriers Are Bringing Back Unlimited Plans As Competition Heats Up
While unlimited data was offered by carriers by default in the early years of the smartphone era, major players began to move to tiered data, given that unlimited plans often increase network congestion and hurt service quality. For instance, Verizon stopped offering unlimited data plans to most customers in 2011. However, unlimited plans saw a resurgence in the U.S. in 2016, with smaller players Sprint and T-Mobile promoting new plans for data hungry users on a budget, with certain restrictions such as the lack of HD video streaming. Sprint's unlimited plan costs $60 for a single line, while T-Mobile's One unlimited plan costs about $70 for a single line, including taxes and fees. Both carriers saw year-over-year improvements in postpaid phone net additions over the holiday quarter, indicating that their unlimited data strategy could be paying off. Verizon, on the other hand, posted significantly slower growth during the quarter, potentially prompting a rethink to its tiered data strategy.
Plans Could Work In Verizon's Favor
As with its tiered plans, Verizon's unlimited offering is more expensive compared to rivals, on account of its superior coverage and the availability of unlimited HD video as opposed to the SD video that T-Mobile and Sprint offer on their basic unlimited plans. However, we believe that the new plan is unlikely to be accretive from an ARPU perspective for Verizon. Verizon Unlimited costs just $10 more than the current "L" plan that offers 8 GB of data (+ 2 GB per line) and the carrier is potentially wagering that it will be able to get enough users from its lower tiered data plans to upgrade to the new unlimited plan in order to offset potential ARPU losses from heavy data users shifting down to the new offering. That said, there will be some passive benefits from the new plan as well. Firstly, Verizon will require customers to sign up for paper-free billing and auto pay in order to avail the introductory pricing. Secondly, customer service costs could also come down on account of potentially lower call center volumes associated with fully unlimited plans.
Disclosure: No positions.