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Verizon`s mobile data growth still driven by Android and 3G


Verizon Communications, quite literally, had a disaster of a third quarter: Hurricane Irene and Tropical Storm Lee having wrecked havoc on its wireline networks and labor strikes delaying its FiOS expansion. But Verizon Wireless remained above the storm, doubling its profits and boosting its subscriber base by 1.3 million, while revealing some interesting details about its mobile data growth in the process.

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Now, 1.3 million net adds makes Q3 a fairly average quarter for Verizon. AT&T net adds totaled 2.1 million last quarter (CP: AT&T doesn’t take Q3 off to wait for new iPhone). But while AT&T’s gains were primarily in wholesale and M2M connections, Verizon grew its postpaid base by 882,000 compared to AT&T`s increase of 319,000. Like with AT&T, those postpaid additions were driven by smartphones.

Consequently, Verizon is starting to beat out its archrival on its own turf: Verizon sold 5.6 million smartphones in Q3 while AT&T sold 4.8 million. AT&T’s multi-year iPhone exclusivity gave it a huge advantage over VZW, giving it last quarter a more than 50% postpaid smartphone penetration. With the iPhone now in hand, Verizon is starting to catch up. Its smartphone penetration sits at 39% of its postpaid base, compared to 36% in Q2 and 24% in Q3 of last year.

But that huge surge isn’t necessarily due to the iPhone. Verizon activated 2.3 million iPhones in the quarter—numbers AT&T beat by at least 100,000—accounting for 35% of total smartphone sales. In contrast, half of the smartphones Verizon sold were Android  devices, both 3G and 4G. Meanwhile, Verizon had activated 6.5 million iPhones in total by the end of September, accounting for 19% of its smartphone base. Admittedly Verizon has only had the iPhone for two full quarters and that iPhone is already 16 months old. The new 4S and discounted iPhone 4, coupled with the holiday season, will surely drive iPhone sales much higher in Q4, but as of now Verizon is still primarily an Android shop.

What’s more, Verizon’s success with Android isn’t tied to its new 4G LTE network. VZW reported only 700,000 LTE smartphone activations in Q3. That means it sold 2.1 million Android devices in the same period—three-quarters of all Android smartphone sales—in the plain vanilla 3G category. There are probably multiple reasons for this, the biggest being that Verizon’s LTE network covered just 160 million pops in Q3 (Unfiltered: VZW packs another 26 markets into LTE footprint). VZW can only market LTE’s full potential to half the country. Customers can still buy an LTE phone if they’re outside of a 4G market, but the LTE devices tend to be more expensive than their 3G counterparts.

As Verizon’s LTE footprint expands--it revealed today its coverage is now 186 million pops--and it gets more LTE devices, it will start seeing bigger boosts in LTE smartphone sales. But clearly LTE isn’t yet a big factor in its smartphone boom. And while the iPhone is clearly adding a huge boost to sales, Verizon’s smartphone growth is still being driven primarily by Android—Android phones running on its CDMA network.

That’s not to say that Verizon isn’t seeing big growth in LTE. It’s just coming from unexpected sources. Verizon sold 1.4 million LTE devices in Q3, but half of them were connected Internet devices, such as tablets, mobile hotspots and laptop data modems. When Verizon first started planning its LTE network, it predicted the primary use case would be broadband access. The explosion in smartphones in the last few years caused it to change its tune, but it turns out it might have been right in the first place.

Operators have been trying to build a business out of mobile broadband access since the advent of 3G. With 700,000 new subscriptions in a single quarter over a network that covers only half the country, VZW may have found the right formula in LTE. At the end of September, 7.8% of Verizon’s postpaid connections--that`s 6.7 million devices--were using mobile broadband plans, though that includes both 3G and 4G.

Verizon Chief financial officer Fran Shammo also indicated that broadband access could be a very profitable category for the operator. Average revenue per user (ARPU) from a mobile Internet subscription is about $49 a month, short of its overall postpaid ARPU of $54.89, but he pointed out those are pure data revenues. VZW’s blended postpaid data ARPU is less than half of that, about $22 a month.

“While the growth of these devices is diluting our postpaid ARPU growth at this time, expanding this category remains a key strategic focus for us,” Shammo said. “We continue to see strong demand for our 4G LTE mobile hotspot devices and PC cards as well as tablets. This category of devices represents nearly 8% of our retail postpaid subscriber base. I would also note that these data-only devices typically carry a much lower subsidy than phones so they have a very short payback period and contribute to profitability fairly quickly.”

In addition, the growth in Internet devices is accelerating the shift of its biggest mobile data users from the CDMA to the LTE network, which is much better positioned to handle it, Shammo said. That it in turn reduces Verizon’s operational and capex costs, he concluded.

Still, the acceleration in mobile broadband access adoption may have less to do with LTE than it does the general proliferation faster networks, less punitive data plans and the growing number of tablets and other mobile computing devices. AT&T didn’t get its LTE network up and running until late in the 3rd quarter (CP: AT&T LTE goes live on Sunday), but it enjoyed similar success in selling broadband access plans, activating more than 500,000 Internet-only devices in the quarter, including 290,000 tablets.

In total, Verizon Wireless now has 107.7 wireless connections, of which 86.2 million are retail postpaid subscribers, 4.5 million are retail postpaid and 17 million are wholesale.


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