Verizon has found the fountain of youth. The largest U.S. telecom company by subscribers reported on Tuesday that wireless revenue grew 8 per cent in 2012. How do sales grow at three times' gross domestic product, and margins expand, in an industry that (given cellphone penetration) should behave like a utility? The answer is the smartphone. In 2012, Verizon added 5 million contract customers. The number of its customers who use smartphones, and therefore pay up for data services, rose by 15 million.
Surprisingly, though, Verizon's smartphone story appears to be more about adding customers than increasing revenue per customer. Contract subscriber growth averaged 5 per cent a quarter this year (more than twice the rate of AT&T over the first nine months). Total wireless service revenue grew just 2 to 3 percentage points faster than that. Verizon changed the way it reports unit revenue this year, so assessing the volume/price balance is a bit tricky. But by any metric, the importance of volumes comes through.
Given this, it is natural to wonder if Verizon is using discounting to pull subscribers in. Verizon's high-quality network is a competitive advantage, but if Verizon was charging full freight for all those new smartphone subscribers' data plans, one would expect average pricing to be growing faster. Family plans, for example, could be bringing in subscribers while lowering revenue per user.
The primary question for investors, on this view, is not how far Verizon can push smartphone penetration (now at 58 per cent of its subscribers) but how long Verizon can continue to use its smartphone offerings to take share from its peers. AT&T's recent announcement that it would increase spending on its network, Sprint's recapitalization by SoftBank, and T-Mobile's acquisition of MetroPCS all suggest that at some point soon the well will run dry.