Brace yourselves folks, Verizon has made its LTE strategy clear, and it’s designed to leave AT&T standing in the dust. Focused on becoming the leading US telecommunications provider, Verizon is positioned to gain both market share and ARPU (average revenue per unit) with its demand that LTE be in all future smatphones and tablets they sell.
While Verizon is winning the LTE race for network coverage, with service in 195 markets reaching 200 million people, their new LTE-only policy is certainly bold, as reports suggest that only 5% of devices shipping in 2012 will be LTE capable. So why such a strong play? Because Verizon has learned a lesson that started with the iPhone and will likely end with the iPad.
Picking the right horse
This aggressive telco vs. vendor tactic has been leveraged previously within the telecommunications industry only it was Apple calling the shots, not Verizon. Historically, telcos have been in control when it comes to their business strategy, network and device lineup. With the groundbreaking launch of the original iPhone by AT&T on June 29, 2007, this all changed. AT&T was selling gold and Verizon was left selling chocolate.
When Apple originally designed the iPhone, it was tailored to the GSM platform. In the early stages of iPhone development, Verizon had the opportunity to pick up the device, but refused to meet Apple’s demands for a phone initially tailored to the GSM platform. As a result, Steve Jobs finalized an exclusive 5-year deal with AT&T. After a rocky start, the iPhone eventually redefined the handset market, gaining market share quarter after quarter, and giving AT&T a competitive advantage over Verizon.
Verizon’s inability to offer the iPhone between 2007-2010 stung for two reasons: the anxiety of losing subscribers to AT&T, and the reality of going against the grain maintaining a CDMA network. With no confirmation from Apple that they would produce a CDMA compatible iPhone, Verizon began to strategically build its next generation network: LTE.
Verizon’s decision to put all its eggs into the LTE basket was a big move. An evolution of the GSM/UMTS standards, LTE required Verizon to buy new spectrum and build costly new base stations separate from their current network. But by adopting the natural evolutionary path of GSM/UMTS carriers (carriers like AT&T), Verizon could protect itself against any possiblility of missing out on the next big device. (even though Verizon managed to secure a CDMA iPhone 4 in Q1 2011, revolutionizing its network was a runaway train that had already left the station. And getting a CDMA iPhone 4 does not guarantee a CDMA iPhone 5). And being first to the LTE party in North America means being best prepared to capitalize on the networks revenue benefits.
Customers using LTE as their preferred network receive enhanced connectivity and faster data, but they in turn provide carriers an increase in potential revenue. The faster customers can click pages, send email and up/download files means more data transferred. AT&T reported post-paid Q3 2011 ARPU of $63.69, ahead of Verizon’s post-paid Q3 2011 ARPU of $54.89. Neck and neck with subscriber market share, Verizon is bell bent on beating AT&T for more revenue per unit. Having spent billions of dollars laying the foundation, Verizon’s ammunition for 2012 will be its LTE network roll out.
It’s no secret that telcos continue to see revenue margins soften on long distance and out of bucket minutes. With that in mind, building a gateway to increase data consumption is the most strategic way for any telco to safeguard market growth and revenue. We’ve already started seeing adjustments to data plan pricing, which is typically positioned as providing more value, but in reality this is a strategy to bring in more revenue while getting consumers hooked on loads of data.
Just one more thing…
Enter tablets, expected to be the next data hungry devices after the Siri-armed iPhone 4S. Consumers are absolutely obsessed with tablets! Research predicts that 2012 will be the start of two tablet households, less than a one year after the launch of Apple’s iPad. Analysts expect that tablet purchases will help carriers close airtime revenue shortfall by activating more data-only subscribers. In the future, telcos will not be paying their bills servicing only the smartphone market; it will be a combination of consumer tablet connectivity and app data hogs like Siri found on the future smartphones that will be their bread and butter. Consumer tablets like the iPad 3 and smartphones like the iPhone 5.
Today, Verizon is forced to make the most of an expensive situation. It knows that LTE smartphone support is the first step to convert their consumer base onto LTE networks. Consequently, to avoid maxed out COA (cost of acquisition) budgets by subsidizing CDMA smartphones today, which will eventually be upgraded to LTE smartphones, Verizon is simply skipping straight to LTE hardware on their product roadmap.
Is it that easy? Bet big on Apple and the future of data revenue to outmanouvre and outgrow your competitors? Likely not, but it’s not unheard of for Apple to be in cahoots with telcos prior to launching a device. Coincidentally, days after Verizon announced its aggressive LTE hardware stance, Apple’s Tim Cook released a statement confirming that the iPad3 will have LTE access. It makes you wonder, did Verizon simply plan really well or are Apple and Verizon up to something?
This could be telco/vendor canoodling at it’s best, or Verizon’s attempt exert their influence for accelerate convergence. Who knows, but little things like Apple and Verizon announcing their quarterly financial results on the same day have to make you wonder.