Here's Why the Worst Is Yet to Come for Verizon Communications Inc.

6/13/17

By Daniel B. Kline, MotleyFool

Verizon (NYSE:VZ) and AT&T (NYSE:T) have long-dominated the wireless industry by touting the quality of their networks. By emphasizing the point that consumers would have a better experience with their service, the two companies built subscriber bases that were around double the size of third-place T-Mobile (NASDAQ:TMUS) and fourth-place Sprint (NYSE:S).

There was a time when Verizon had a real edge. Verizon has steadily topped all three of its rivals in the twice-a-year RootMetrics report on wireless networks. In recent quarters, however, that advantage has slipped, and OpenSignal, another company that tracks wireless network quality through itsState of Mobile Networks Report, showed in February that T-Mobile had caught up to Verizon.

"The LTE speed race between T-Mobile and Verizon has long been a close one, but in our last U.S. report T-Mobile held the edge," according to OpenSignal. "That narrow lead, however, disappeared in our latest round of testings. We measured average LTE download speed on T-Mobile at 16.7 Mbps and on Verizon at 16.9 Mbps, results close enough to produce a statistical tie."

That's bad news for Verizon which has built its wireless business on having the best network. It still may have that, but T-Mobile has clearly closed the gap. T-Mobile and Sprint have both been working feverishly to make that point to consumers.

Verizon's former "can your hear me now" spokesman

VERIZON IS BEING HURT BY SPRINT ADS FEATURING ITS FORMER SPOKESPERSON. IMAGE SOURCE: SPRINT.

What are T-Mobile and Sprint doing?

While T-Mobile has been the fastest-growing wireless company, Sprint has been leading the charge against Verizon. The No. 4 carrier has been running ads starring Paul Marcarelli, who for years worked as Verizon's "Can You Hear Me Now?" spokesman. In his Sprint ads, Marcarelli makes the point that all networks are good and that it's silly to pay extra for what he calls a 1% difference.

T-Mobile hasn't been quiet in going after Verizon, either. CEO John Legere takes credit for forcing Verizon to offer unlimited data plans while also trying to woo its customers with a special offer.

"After desperately launching unlimited, Verizon's network choked -- while our network speeds surged. Today, T-Mobile has a whopping 23% speed advantage over Verizon," he said in a press release. "So to kick off summer, we're going BIG right out of the gate and throwing a lifeline to millions of Verizon customers. Now, you can ditch Verizon, keep your phone, and we'll even pay it off for you!"

Why is this bad for Verizon?

Just having to offer unlimited data plans hits Verizon in the pocketbook. The company, along with AT&T, has made billions in overages, with customers buying larger plans than they need to avoid running out of data. Unlimited data ends that.

In addition, the company has the further problem that if consumers start believing it doesn't have a superior network, there's no reason for them to pay more for its service. Verizon currently charges $160 for three unlimited lines or $180 for four. That's well more than T-Mobile at $130 for three or $140 for four, and double Sprint's promotional offer of $90 for up up to five lines with unlimited data.

These shifting trends explain why T-Mobile has added more than 1 million new customers every quarter for four years. Verizon lost 307,000 retail postpaid customers in Q1.

These industry changes put Verizon in a position that will ultimately hurt its profits. The company can either stay the course and keep its prices high, which will lead to subscriber loss, or it can cut prices. Neither situation should warm the hearts of shareholders, who will see a company forced to make less money in its core business one way or the other.

10 stocks we like better than Verizon Communications
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Verizon Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.

It's on us. Share your news here.

Submit your stories and articles to citybizlist today.