Verizon Is Already Benefiting From the Proposed T-Mobile-Sprint Merger

Verizon Communications (NYSE: VZ) is expected to post its first year-over-year increase in service revenue since 2014.

Verizon saw service revenue tank after T-Mobile (NASDAQ: TMUS) started its Un-carrier initiatives, including unbundling installment plans and service contracts and bringing back unlimited data plans. The moves, combined with Sprint‘s (NYSE: S) aggressive pricing, put pressure on the larger competitor to follow suit and make some customer-friendly changes in order to prevent subscriber losses. Those measures coupled with limited subscriber growth led to a decline in wireless service revenue.

But 2018 has seen the wireless industry become much less aggressive, and the agreement between T-Mobile and Sprint seems to have completely calmed the waters. Analysts at Deutsche Bank expect Verizon will post a year-over-year increase in service revenue when it reports second-quarter earnings. Here’s why and why that’s important to investors.

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The age of aggressive price promotion may be over

A couple years ago T-Mobile was throwing everything it could at customers in order to get them to switch to T-Mobile. It gave away the iPhone 7 to any customer that turned in an eligible device. But the competition quickly copied that promotion, and it turned out it didn’t drive very many net new active users for T-Mobile. Last year, iPhone promotions were much more muted.

Pricing promotions have also been more tame this year. T-Mobile has run some free additional lines for family plans and targeted specific demographics with deals (e.g., 55 and older, military families), but it hasn’t been nearly as aggressive as it has in the past. Likewise, Sprint just ran a deal offering a $15-per-month unlimited plan, but last year it repeatedly ran a promotion offering a free year of its unlimited data plan to anyone that switched. Verizon has experimented with promotional pricing for a very limited demographic (Floridians age 55 and up) as a response to T-Mobile.

The “grow at all costs” initiatives are part of T-Mobile’s past. It’s now much more measured in who it targets with promotions, looking for customers that could offer better expected lifetime value in exchange for lower monthly prices.

Verizon is lapping its unlimited plan debut

Verizon finally released its unlimited plan in the first quarter of last year after losing hundreds of thousands of subscribers to competing carriers. The first people that switched to the unlimited plan were those that either subscribed to Verizon’s largest data plans or consistently paid overages. As a result, the new plan actually put further pressure on Verizon’s service revenue.

Verizon will lap the first full quarter of its unlimited plan offer this quarter. That should ease the pressure on service revenue growth, enabling it to improve year over year.

Verizon did make some changes to its unlimited plan pricing, splitting it into two tiers, in the second half of last year. That could put further pressure on service revenue that won’t lap until later this year. Still, the biggest hurdle seems to have occurred quickly after Verizon introduced its original unlimited plan pricing.

Why service revenue matters for investors

Incremental service revenue for Verizon’s wireless business comes with a relatively high profit margin. The wireless industry has significant fixed costs. Verizon’s ability to leverage those fixed costs into higher revenue means more money flows to the bottom line.

While Verizon has its hand in several other ventures, wireless is still its big moneymaker.

Device revenue ultimately doesn’t move the needle for Verizon’s profits, although it can produce significant cash flow. Service revenue is where the company really makes its money, and its growth is essential for investors to start seeing meaningful increases in earnings per share. A calm wireless industry with less competition is making that service revenue growth possible.

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

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