Verizon Communications Inc. (VZ), the second-largest U.S. phone company, must adopt a more “entrepreneurial culture” in its shrinking land-line business, incoming Chief Executive Officer Lowell McAdam said.
A former chief of Verizon Wireless and current president of Verizon, McAdam takes over next month for CEO Ivan Seidenberg, who remains chairman, Verizon said yesterday. The company posted a second-quarter profit of $1.61 billion as customers snapped up the iPhone, helping make up for a fixed-line revenue decline.
McAdam, 57, will aim to keep New York-based Verizon’s wireless-customer gains ahead of those of rival AT&T Inc. (T), which is set to become the dominant mobile carrier after acquiring T-Mobile USA Inc. He also needs to manage a loss of traditional phone users, while challenging cable-TV companies with the FiOS fiber-optic TV and Internet service.
“We will definitely try to bring that entrepreneurial culture from the wireless side into the wireline side,” McAdam said yesterday in a phone interview.
Seidenberg assembled the network assets and infrastructure that Verizon can now use to sell services such as wireless video and so-called cloud computing, in which companies hire Verizon to host their data remotely, McAdam said.
“You’ll see an acceleration of applications and services,” he said.
Second-quarter profit was 57 cents a share, after a loss a year earlier, Verizon said yesterday, topping the 55-cent average of estimates compiled by Bloomberg.
“They’re going to continue to go after wireless growth and grow the fiber part of the business,” said Todd Rosenbluth, an equity analyst at Standard & Poor’s in New York, who advises holding the stock. “This is a well-orchestrated handoff. Given that he’s been chief operating officer for the past year, we don’t expect much change in strategy.”
In a bid to outdo rivals’ data speeds, Verizon Wireless is building a new high-speed network over three years. The 4G technology, along with the introduction of Apple Inc. (AAPL)’s iPhone, helped Verizon add 1.3 million contract subscribers last quarter, compared with the 948,000 estimate of six analysts compiled by Bloomberg. That beat gains at Dallas-based AT&T, the largest U.S. phone company, which has had the iPhone since 2007.
“Verizon still has enjoyed the perception of having a better network,” said Jonathan Atkin, an analyst at RBC Capital Markets in San Francisco. He projects the shares will outperform others in the industry in the next year. “The playing field has been leveled, with both companies having a similar array of devices.”
Verizon, which co-owns its mobile unit with Vodafone Group Plc (VOD), fell 83 cents to $36.74 yesterday on the New York Stock Exchange. The stock has added 2.7 percent this year.
McAdam will be CEO effective Aug. 1, while Seidenberg, 64, will remain chairman. McAdam had run Verizon Wireless, the most profitable part of Verizon, for more than three years, before his appointment as president last year. By boosting sales at the wireless unit, he helped the parent company grow even as it lost home-phone customers.
McAdam helped build Verizon Wireless into the biggest U.S. mobile-phone carrier, serving as the division’s operating chief after its inception in 2000. He previously ran wireless provider PrimeCo Personal Communications as CEO, worked as vice president of international operations at AirTouch Communications and held various roles at Pacific Bell.
After his promotion to president last year, McAdam brought with him a code of conduct, called the Credo, that the mobile unit had introduced in 2002. “We know our best was good for today. Tomorrow we’ll do better,” one part of the Credo reads.
“It’s a rallying cry for our business about what we think is important and how we conduct ourselves,” he said. “It’s been very well embraced, and we’ve got a journey here to learn to live it out.”
On an internal webcast yesterday, executives praised three employees who they said lived up to the Credo. One woman in the finance department took the initiative to redesign how Verizon activates accounts, saving the company $60 million, McAdam said.
McAdam is also reworking labor contracts in the landline unit. Verizon is proposing to put union members on the same health-care plan as management and wireless employees to cut costs, he said.
The company has also proposed changing work rules it argues no longer make sense. One rule from 1963 requires the company to send two workers for service calls in Manhattan’s Upper East Side, a formerly dangerous neighborhood that’s now one of New York’s safest, McAdam said.
“They understand that the business has changed and our relationship needs to evolve,” McAdam said. “It will give us a brighter future from a growth perspective, instead of being kind of an antiquated phone company that slowly loses business and eventually goes out of business.”
Verizon’s union contract is scheduled to expire Aug. 6, said Ron Collins, chief of staff at the Communications Workers of America.
“We’re not as optimistic as Lowell is,” he said. “Things are moving very slowly in negotiations.”
Verizon is seeking hundreds of concessions and hasn’t withdrawn any, Collins said. While the union is willing to make reasonable changes in work rules, the health-care proposal is a “radical change” that will increase co-payments and deductibles for workers, he said. Verizon is a profitable company that isn’t in danger of going out of business, he said.
Verizon will lose its title as the No. 1 mobile carrier if AT&T completes its $39 billion T-Mobile purchase, announced in March. AT&T said this week it expects to complete the deal, which combines the No. 2 and No. 4 carriers, in the first quarter of next year. The takeover is being reviewed by the U.S. Federal Communications Commission and the Justice Department.
McAdam, who started his private-sector career in 1983 as the old Ma Bell was being broken into pieces, will also need to help Verizon succeed in an industry in which Apple and Google Inc. (GOOG) are gaining more power.
The iPhone and phones running Google’s Android operating system represent the fastest-growing part of the mobile-device market, with Apple and Google being both rivals and partners to Verizon. Apple and Google market mobile applications that compete with Verizon’s products, even as the iPhone and Android phones operate on Verizon Wireless’s network.
Verizon Wireless gained 2.3 million iPhone customers last quarter, the first full period it carried the device. AT&T won 3.6 million iPhone users in the period. AT&T cut the price of the older 3GS model to $49 to entice customers to stay, while the latest iPhone version costs $199 at both AT&T and Verizon.
AT&T’s four-year U.S. exclusivity deal for the iPhone ended in February when Verizon began selling the device. AT&T, which trails Verizon in mobile-phone subscribers, said it added 331,000 contract customers last quarter and 1.1 million total wireless users, half of Verizon’s 2.2 million additions.
“Doubling up AT&T is very strong performance,” McAdam said. “We’re showing really balanced growth across the portfolio.”
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