Verizon Mobile Profit Under Threat as Price War Escalates

Verizon Communications Inc. (VZ), owner of the biggest U.S. wireless network, said it’s studying how to respond to intensifying price competition, potentially leading to moves that may reduce its profit margins.

After reporting a fourth-quarter wireless margin of 47 percent -- up 5.6 percentage points from a year earlier -- Verizon executives said today they may make adjustments to contend with the no-contract plans, lower roaming fees and other discounts offered by rivals such as T-Mobile US Inc. (TMUS)

“We are prepared to respond where we see a need to respond,” said Fran Shammo, Verizon’s chief financial officer, in an interview today. He declined to discuss how Verizon’s current quarter is going so far.

Related: Verizon Agrees to Acquire Intel Media to Expand Web TV Offers

With its cheaper plans and buyout offers to customers that switch from other carriers, T-Mobile has added more than 2 million monthly subscribers in the past three quarters, compared with Verizon’s 3.4 million. The smaller carrier’s growing influence overshadowed Verizon’s fourth-quarter profit, which beat analysts’ estimates as customers’ wireless bills increased.

Verizon shares dropped 1.3 percent to $47.70 at the close in New York. The shares have climbed 11 percent in the past year.

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“We expect rising competitive intensity to create a headwind for growth in 2014,” Jonathan Chaplin, an analyst with New Street Research, wrote in a note today. “We don’t think Verizon is out of the woods. We believe competitive pressure is still coming.”

Earnings Beat

Fourth-quarter earnings were 66 cents a share, leaving out one-time expenses, New York-based Verizon said today in a statement. Analysts had estimated about 65 cents on average, according to data compiled by Bloomberg.

Verizon’s wireless results beat analysts’ estimates for subscribers, spending and profits. While the company’s 1.6 million new monthly subscribers were down from a record 2.1 million a year earlier, they beat the average estimate of 1.3 million new subscribers, based on a Bloomberg survey of nine analysts.

The average mobile-phone bill increased 7.1 percent to $157.21, above the $156.38 average estimate. The wireless division’s 47 percent profit margin compared with an estimate of 46.4 percent.

The company has managed to keep expanding profits amid tougher competition because it has a reputation for better customer service and network quality, said Craig Moffett, an analyst at MoffettNathanson Research. That may not be enough to stay above the fray as AT&T Inc. (T) and Sprint Corp. move to match the deals offered by Bellevue, Washington-based T-Mobile, leaving Verizon looking expensive to consumers, he said.

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Verizon said it expects to close its $130 billion deal with Vodafone Group Plc for full ownership of Verizon Wireless on Feb. 21. Close

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Verizon said it expects to close its $130 billion deal with Vodafone Group Plc for full ownership of Verizon Wireless on Feb. 21.

‘Successful, Vulnerable’

“There is a price differential where -- well, where even satisfied customers will declare enough is enough. The only question that remains is whether we have already crossed it,” Moffett wrote today in a research note. “They are vulnerable precisely because they have been so successful.”

Verizon’s biggest rival, Dallas-based AT&T, is scheduled to report fourth-quarter results Jan. 28.

Verizon said it expects to close its $130 billion deal with Vodafone Group Plc for full ownership of Verizon Wireless on Feb. 21. The move gives Verizon full control of the largest and most profitable U.S. wireless carrier, meaning it will no longer have to split earnings with Vodafone.

In a separate transaction announced today, Verizon agreed to acquire Intel Corp.’s pay-TV startup, gaining technology for video service over high-speed Internet connections. Financial details weren’t disclosed.

FiOS Gains

Verizon’s pay-TV service, FiOS, added 92,000 television customers in the fourth quarter for a total of 5.3 million. The network’s Internet users climbed by 126,000 to 6.1 million. Todd Rethemeier, an analyst with Hudson Square Research in New York, had estimated TV gains of 130,000 to 150,000 and Internet additions of 150,000 to 175,000.

Sales to large corporate customers in 2014 will probably be similar to last year, when the enterprise business had $14.7 billion in revenue, Shammo said today on a conference call.

Total sales rose 3.4 percent to $31.1 billion in the fourth quarter, above analysts’ estimates for $31 billion. Net income attributable to Verizon was $5.07 billion, or $1.77 a share, compared with a net loss of $4.23 billion, or $1.48, a year earlier, when results included a non-cash pension adjustment.

To contact the reporter on this story: Scott Moritz in New York at smoritz6@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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