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Competition Increases As Verizon Looks For New Ways To Gain Market Exposure

|Includes: Verizon Communications (VZ)

Verizon Communication's Control over Market Share

Profile

With a market cap of $145 billion and an industry leader by its number of subscribers, Verizon Communications (NYSE:VZ) provides communications, information and entertainment products and services to consumers, businesses, and governmental agencies worldwide. Its wireless segment, Verizon Wireless, provides customers with access to voice and data services comprising of internet access through smart phones, tablets, and computers. VZ's wireline segment provides TV, broadband, and voice services through its bundle called Verizon FiOS.

Subscriber growth, postpaid and prepaid compression, and Mixed Wireline Outlook

Analysts covering VZ have lowered the company's wireless postpaid adds by 50k to 900k. Verizon still dominates subscriber growth within the market, beating out AT&T's ~500k adds as well as T-Mobile's ~300k. Prepaid adds are also expected to come in lower than anticipated with analysts marking down the number of adds to 25k from 175k. The pressure on postpaid and prepaid adds lowers estimates on wireless revenue growth to 8.0% YoY from 8.2% YoY.

Wireline activities remain strong within its consumer segment but pressured by its wholesale and enterprise business. Verizon's Internet, TV, and voice package called Verizon FiOS, has grown roughly 16% since 1Q12. Within one year, FiOS has added 1.1 million subscribers and is now 69% of Verizon's consumer revenue. According to JPMorgan analysts, FiOS is estimated to add 285k subscribers, 44k more than previously expected. Verizon's main competitor, AT&T, also has an internet, TV, and voice bundle called U-Verse which has been growing at a faster pace in the last two years. It must be noted that U-Verse is only three years old compared with the matured FiOS. Wholesale and enterprise continue to struggle as analysts downgrade its revenue by 3% and 7.5% YoY, respectively. The decrease in Verizon's wholesale and enterprise business bring down Verizon's total wireline revenue to -1.4%.

Capital Expenditures

Verizon wireless is expanding its high speed data broadband network throughout smaller cities within the U.S. Within the past couple weeks Verizon has extended its LTE network throughout small cities in Nebraska, Tennessee, and New York. Verizon's network is almost fully equipped with LTE, well ahead of its competitor AT&T which extends LTE to only 60% of its market. Analysts estimate Verizon's capex to be nearly $9.3 billion, mainly due to Verizon's attempt to broaden its LTE coverage throughout the country.

Competitors and Market Exposure

The telecom industry is saturated with many competitors and a rapidly changing market due to increased demand for faster, sleeker, and better products. AT&T is currently receiving a lot of attention from analysts with its strong interest in Leap Wireless, a small prepaid carrier. The acquisition would help AT&T gain market exposure to prepaid adds, a weak point in Verizon Wireless' business. Another industry competitor, T-Mobile, recently merged with Metro PCS to become T-Mobile US. Together, the two now have a customer base of 43 million. The merge of the two "creates an even stronger disruptive force in the U.S. wireless market" says T-Mobile US CEO John Legere.

As for the leader of the pack, Verizon has still yet to find a path to create growth so the company can move on to the next "stage". Recent reports suggest Verizon is showing interest in buying the 45% stake Vodafone has in its Verizon Wireless Company. The purchase would allow Verizon to enjoy healthier revenues and profits, however reports imply a buyout would require a large price tag. In other news, Verizon has flirted with the idea of extending its market exposure north of the border in a potential purchase of Canadian based wireless company, Wind Mobile. Verizon's latest offer was reported to be for $700 million. The acquisition would increase its market exposure as well as its customer base in Canada, increasing its future growth prospects.

The Apple Dilemma

In 2010, Verizon made an agreement with Apple in order to gain access to the Apple's iPhone. The agreement states, among other things, that Verizon is obligated to buy $23.5 billion worth of iPhones just for 2013. According to telecommunication analyst Chris Moffeit, the purchase commitment is almost twice the amount that Verizon has sold throughout 2012, creating a gap around $12 to $14 billion in money that may be owed to Apple. This could cause a stir for Verizon's investors as the situation would put pressur on Verizon's future cash flow.

Concluding Remarks

Verizon is not the largest company by market cap within the industry, however the telecommunication giant is the number one carrier by subscribers. Its superb consumer ratings along with its fast, vast 4G LTE exposure make it an investor favorite within telecommunication companies. However, there are points of concern. With AT&T acquiring a small prepaid carrier, T-Mobile merging with Metro PCS to become T-Mobile US, Verizon finds itself in need of a deal to gain market exposure. Its interest in Canadian markets would give Verizon a huge boost in global market share. Verizon must repond quickly, as the industry is fast paced and constantly changing.