Verizon Communications Inc. (VZ:US) is preparing for its own surge of customers opting to pay for smartphones on installment plans, threatening to shrink monthly wireless bills.
Like AT&T Inc. (T:US)’s Next plan, Verizon’s Edge service sells smartphones at full price instead of giving discounts in exchange for two-year subscriptions. While the new model gave AT&T a spike in device sales last quarter, customers using Next will have lower monthly bills than subscribers on contracts, potentially squeezing margins. While Verizon said the impact of Edge, introduced in August, was “minimal” in the first quarter, it is likely to be more pronounced in the future.
That looming shift in revenue cast a shadow today over first-quarter earnings that beat analysts’ estimates. Verizon also had a net loss of phone subscribers for the first time, a sign that AT&T and T-Mobile US Inc. (TMUS:US) are making headway in going after its users.
Related: AT&T Falls as Phone Installment Plans Weigh on Profit Outlook
“Subscriber trends in the quarter are a clear sign that competitive activity is starting to take its toll,” said Jonathan Chaplin, an analyst at New Street Research, in a note to clients today. “We remain concerned about the headwind from rising competitive intensity.”
Shares of Verizon slid (VZ:US) 2.4 percent to $46.28 at the close in New York, the biggest single-day decline since Feb. 3. The stock has fallen 11 percent in the past year.
Verizon reported earnings of 91 cents a share, adjusted to approximate a full quarter’s ownership of the wireless business, New York-based Verizon said today in a statement. Analysts projected 87 cents on average. Verizon acquired Vodafone Group Plc’s 45 percent stake in the mobile-phone unit on Feb. 21 for $130 billion, the third-largest deal in history.
The company’s wireless unit added 539,000 monthly subscribers, compared with the average estimate of 512,000, based on a Bloomberg survey of nine analysts. A net gain of 634,000 tablet users helped make up for a net loss of 138,000 phone customers. While the company gained customers for smartphones for 4G networks, it lost more users of devices with older technology.
Verizon has relied on its network’s reputation for quality, along with a few discounts for key subscribers, such as those on big-spending family plans. The question is whether that will continue to be enough as more customers’ contracts come up for renewal, letting them peruse competitors’ offers.
“The effects of the ‘price war’ haven’t been felt yet, since only the new customers have lower prices,” said Roger Entner, an analyst with Recon Analytics in Dedham, Massachusetts. “There’s a tremendous amount of inertia among consumers, so the immediate impact is muted. It will happen, but over years.”
Edge customers represented less than 15 percent of new phone purchases in the first quarter and now make up less than 2 percent of the total subscriber base, Verizon Chief Financial Officer Fran Shammo said today in a phone interview. AT&T said more than 40 percent of new customers signed up for Next plans last quarter, up from 15 percent in the prior period.
“Customers are coming in and asking about installment plans -- that’s what’s driving the market,” Shammo said. “Edge is a good thing. It’s another way to add customers and it is profitable to us.”
Verizon’s average mobile-phone bill rose 6.3 percent to $159.67, higher than the $159.20 average of six analysts estimates.
The company’s monthly subscriber additions were less than the 677,000 gained a year earlier, and also fewer than the 625,000 users that AT&T added in the quarter. That’s the first time AT&T has beat Verizon in subscriber additions since the third quarter of 2010, according to Bloomberg Industries.
Even with Verizon’s attempts to lure more mobile-phone customers with discounts on devices, profit grew for its wireless unit. The division’s margin rose 1.7 percentage points from a year earlier to 52.1 percent. Analysts predicted a margin of 49.8 percent, according to an average of eight estimates.
Verizon’s landline unit, meanwhile, faced fiercer competition from cable-TV carriers. Pay-TV service FiOS added 57,000 customers, the fewest ever, for a total of 5.3 million. The network’s Internet users climbed by 98,000 to 6.2 million.
Total sales rose 4.8 percent to $30.8 billion in the quarter, compared with analysts’ estimates for $30.7 billion. Net income was $3.95 billion, or $1.15 a share, compared with $1.95 billion, or 68 cents, a year earlier, before Verizon had completed its wireless deal.
To contact the reporter on this story: Scott Moritz in New York at firstname.lastname@example.org
To contact the editors responsible for this story: Sarah Rabil at email@example.com Crayton Harrison, Anne Reifenberg