There's no question that T-Mobile's UnCarrier strategy has shaken up the wireless market. But how long will it take for Verizon Wireless to respond to the pressure?
This is the question I answer in this edition of Ask Maggie. There's a good reason why Verizon has consistently had lower churn rates and higher customer addition rates than its competitors. But the tide may be turning for Big Red, as more and more customers are enticed by T-Mobile's lower prices and seemingly customer-friendly policies.
Verizon feels the heat from T-Mobile
I have been a Verizon Wireless customer for 15 years. I really like the service. I have never had a problem with coverage or dropped calls or anything like that. But the service is expensive. And I'm tired of paying so much. I've been really intrigued by T-Mobile's pricing and special offers. But I am not sure T-Mobile will work where I live. Do you think there is any chance that Verizon will lower its prices, or am I just dreaming?
Frustrated Verizon customer
Dear Frustrated Verizon customer
It is hard to say for certain what Verizon Wireless will do in terms of its pricing. But I don't think that your hopes of it responding to competitive pressure is a pipe dream. The question really is whether its response will be enough to keep you and other tempted customers to stay with Verizon.
Verizon Chief Financial Officer Fran Shammo acknowledged during the company's fourth quarter conference call that Verizon is "seeing a certain segment of our base" responding to competitive offers. Although he didn't name T-Mobile specifically, it doesn't take a genius to figure out that T-Mobile and its UnCarrier strategy is what's putting pressure on Verizon. The company added 4.4 million new subscribers to its network in 2013 in large part due to its aggressive pricing plans and other offers.
T-Mobile's UnCarrier push, which began in March of last year, has struck a chord with consumers. While pricing is certainly a major factor for why people are choosing T-Mobile, it's not necessarily the only reason this strategy is working. After all, T-Mobile has long been the leader among the major wireless carriers on price. Its prepaid service and postpaid plans have always been less expensive than anything offered by AT&T and Verizon Wireless.
Now, T-Mobile is offering something in addition to low cost: It's listening to its customers. T-Mobile CEO John Legere says this is the key factor in T-Mobile's success. He said the company is finding out customers' "pain points," and it's designing service plans and promotions to knock them down one by one.
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For instance, customers don't like contracts; T-Mobile eliminated the contract. They want to upgrade their phones early; T-Mobile offered an early upgrade program. Consumers detest the surprise bill from roaming charges while on a trip; T-Mobile gave customers free international data roaming. Customers are fed up with early termination fees; the company offered to pay those fees for anyone switching to T-Mobile.
The flashy advertising and the company's colorful CEO have helped seal the deal to make people feel like a revolution in wireless is afoot. And to some extent, it is a revolution. Legere and his marketing team have pulled off an amazing stunt by getting loyal customers like you to even consider dropping Verizon.
Somehow T-Mobile has been able to make consumers feel like it's looking out for their well-being. Whether that is true or not, doesn't matter. Customers are starting to flock to T-Mobile. And I honestly believe that Verizon and the rest of the industry will have to respond.
The competitive response to the T-Mobile 'UnCarrier' movement
In fact, we're already starting to see it happen.
AT&T, which has been the target of many of T-Mobile's marketing attacks, has been the quickest to respond. This makes sense given how easy it is to use an unlocked phone from AT&T on T-Mobile's network.
After the launch of T-Mobile's UnCarrier program last spring, AT&T announced an early upgrade program in the summer and then revised that program in December to more closely match what T-Mobile offers. AT&T also introduced a new plan for customers who already own their phones, offering a $15 a month discount on service, much like T-Mobile's no-contract plans. And in an effort to strike back at T-Mobile, AT&T announced earlier this month that it would pay people to leave T-Mobile for AT&T.
Sprint has also attempted to compete against T-Mobile by introducing new plans, such as its Framily Plan. It announced an early upgrade plan, but then cancelled that offer when it introduced the Framily Plan. And then it reintroduced a different offer. In general, Sprint has been less aggressive about matching T-Mobile's initiatives.
Verizon Wireless has been the least reactionary carrier to T-Mobile's moves, which is not surprising. In terms of service reliability and network coverage, Verizon has always had a rock-solid reputation that has far exceeded its competitors. As a result, it's had the lowest churn in the industry for years. And it often leads the market in customer additions. And because of this strong position, Verizon has been able to charge a premium for its services.
Even though T-Mobile has been improving its network, the carrier still doesn't have the coverage that Verizon has. And at the end of the day, that is still the most important thing to a wireless subscriber. My guess is that's why you have been with Verizon for 15 years, even though you have always been able to get a less expensive service from T-Mobile.
Verizon knows this. It knows that it is in a good position in terms of its network coverage and performance. And it doesn't need to be reactionary. Its customers pay more for their service than they do with any other carrier, and the company still manages to keep those customers on its network, and it even adds more than it loses each quarter. Why change?
This is not to say that Verizon's management team is so arrogant to believe that T-Mobile is not a threat at all. As I mentioned earlier, the company's CFO said recently that it's starting to feel the pressure in certain segments of the market. And Verizon's rock-solid network performance has taken a few hits recently, especially in big cities where its 4G LTE network has been overloaded.
So what will it take for Verizon to react? The answer is simple: customer defections.
"As long as Verizon continues to lead the industry in terms of contract additions, they won't have to do anything," said Roger Entner, a principal analyst at Recon Analytics. "But if people are voting with their feet, Verizon will have to move."
I agree. The problem for you is that we aren't at that tipping point yet. In fact for the fourth quarter of 2013, Verizon reported another big quarter for customer additions, adding 1.7 million net new customers.
But it looks like there may be some cracks in Verizon's foundation. My CNET colleague Roger Cheng points out in a story from earlier this week that even with this strong subscriber growth, Verizon may be vulnerable. A more in-depth look at the company's subscriber figures show Verizon's potential weaknesses.
"While the company added 1.4 million net new 4G smartphone customers, it said it added a total of 824,000 total phone customers, suggesting it lost 576,000 basic phone and 3G smartphone customers. AT&T saw a similar phenomenon in the third quarter."
Roger also highlights in his story that Verizon will have to do something in 2014 to protect its base of customers that are upgrading from traditional basic phones or 3G devices to 4G smartphones. There are still a lot of those customers out there. Shammo said on the call that Verizon still has 25.5 million basic phone customers and 24.7 million 3G smartphones on Verizon.
What will Verizon do?
Verizon has already started to react to T-Mobile's moves. Not only has it rolled out its early upgrade program, called Edge, but earlier this week it unveiled a lower-priced option for its Share Everything plan. The new tier of service offers customers unlimited calling, text messaging and 250MB for $60 a month. This entry-level plan is likely designed to entice customers upgrading from a basic phone to a smartphone to stick with Verizon instead going elsewhere for a less expensive service.
Right now it's unclear if this will be enough to keep customers on Verizon's network, especially as T-Mobile offers to pay early termination fees. My guess is that Verizon will continue to harp on its superior network and coverage for as long as it can. And it will react incrementally to T-Mobile's moves.
For example, I don't think Verizon will offer its own ETF payment option to win new customers. And I don't think it will give international roaming away for free. The company has far more business customers who travel than T-Mobile has.
That said, Verizon may try to unbundle the cost of devices from its service plans, as AT&T has done. This could offer existing customers who have long since paid off their devices a reason to stick with the carrier. But again, I don't see Verizon making this move until it's actually hurting in the customer department. And so far, that's not happened.
The bottom line
T-Mobile's aggressive UnCarrier strategy is putting pressure on all the other major carriers, even Verizon. But so far Verizon is the least damaged by T-Mobile's moves.
What this means for consumers is that Verizon will probably start to make some changes to its plans. But I wouldn't hold my breath waiting for major savings.
I don't expect Verizon to match T-Mobile move for move. What is more likely to happen is that Verizon will craft its own consumer-friendly-sounding promotions. Whether these promotions will actually save customers money or not depends on how much the company is hurting from the competitive pressure. If AT&T starts picking up customers, as it tries to match T-Mobile's moves, it could exacerbate Verizon's troubles and get the company moving more quickly.
My advice to you is this: If you really are tired of paying Verizon's high prices and you live and work someplace where you can get decent T-Mobile coverage, switch carriers. I wouldn't wait for Verizon.
If T-Mobile doesn't offer great service where you live, you may want to consider AT&T. While its service is still more expensive than T-Mobile's service, it may be a better deal than what you already get with Verizon. And since AT&T also has extensive coverage and a well-performing 4G LTE network, you might be able to get a less expensive service without sacrificing network coverage and performance.
I hope this advice was helpful. Good luck!
Should I take T-Mobile's ETF offer?
My wife is already over at T-Mobile. I have an iPhone 5 16GB already, but I have another nine months left on my AT&T contract. I was thinking about making the switch to T-Mobile, but I'm wondering if I'm better off just paying the early termination fee myself and just using my AT&T iPhone 5. Or would I be better off trading in my phone and letting T-Mobile pay my ETF? What do you think?
You'll have to do the math to see how much you still owe on your AT&T contract. But remember that the cost of the ETF is reduced each month of service. And you also have to consider how much it would cost you to replace the iPhone 5 you already have if you go to T-Mobile's network, since T-Mobile requires that you trade in your existing device and buy a new one from T-Mobile when it pays your ETF.
Considering that a new iPhone 5 or iPhone 5S at full price will likely cost you more than $500 and $600 respectively, you are probably better off just keeping your existing phone and paying the AT&T ETF. Then when you're ready for a new smartphone, you can sell your existing iPhone 5 yourself to help defray the cost of a new phone. It's possible that you could get more money selling your iPhone 5 yourself instead of trading it in to T-Mobile, depending on how much effort you're willing to put in to sell your old phone.
You can check one of my previous Ask Maggie columns on this subject to get more details. Good luck!
Ask Maggie is an advice column that answers readers' wireless and broadband questions. The column now appears twice a week on CNET offering readers a double dosage of Ask Maggie's advice. If you have a question, I'd love to hear from you. Please send me an e-mail at maggie dot reardon at cbs dot com. And please put "Ask Maggie" in the subject header. You can also follow me on Facebook on my Ask Maggie page.