Verizon Wireless not messing with prepaid

While wireless subscriber growth in the first quarter was largely driven by prepaid, Verizon Wireless (NYSE:VZ, NYSE:VOD) isn’t putting too much stock in the new unlimited usage plans being proffered by its competition. Verizon has always focused on the high-end postpaid plans, and despite the precariousness of the economy, has no plans to offer an unlimited prepaid plan of its own, said Verizon Communications Chief Financial Officer John Killian.

“We do not feel compelled or feel it’s the right strategy for us to go out with any kind of unlimited prepaid offering,” Killian said, speaking at JP Morgan’s Global Technology Conference today. That makes Verizon’s view unique as many of its competitors have made a killing offering just such plans in recent months. Prepaid accounted for 80% of US subscriber growth in the last quarter. Sprint (NYSE:S) staunched multiple quarters of subscriber bleeding by signing up in the first quarter 764,000 new Boost Mobile prepaid customers, many of which latched onto its new $50 unlimited voice plan. Leap Wireless (NASDAQ:LEAP) and MetroPCS (NYSE:PCS) both had stellar quarters, driven by expansion into new markets and the popularity of their local unlimited plans.

Like its competitors, Killian said, Verizon has been seeing renewed interest in prepaid from its customers, adding more than 300,000 non-contract subscribers last quarter. But in Verizon’s eyes prepaid will always be a supplemental service, targeted at higher-end users that don’t have the credit to qualify for—or simply don’t want--a contract plan.

“When a customer comes into the store a store, we always lead on the postpaid side,” Killian said. “Our view now is we have the right strategy in place. Continuing to focus and lead on the postpaid side of the market makes imminent sense for us.” Verizon managed to beat out all of the competition in the first quarter with 1 million postpaid net subscriber additions. In addition 41% of its direct device sales were for integrated data devices, which drive higher revenues per subscriber than voice centric prepaid plans, Killian pointed out, the implication being Verizon would rather have a high-dollar mobile data plan subscriber than a budget prepaid subscriber any day.

“We still believe there are a lot of untapped [postpaid subscribers] out there,” Killian said. “We’re still growing net adds and believe we will for quite a while because of the strength of our network position.”
While carriers have tapped into budget-conscious sensibilities by beefing up their prepaid offers, analysts warn operators may be falling into a trap. By making prepaid more attractive, carriers may find customers won’t revert back to contracts when the economy improves. That will leave operators with a large base of low-dollar customers dragging down their average revenue per subscriber (ARPU).

“It is quite likely that 50% to 60% of such consumers don’t go back to postpaid,” Chetan Sharma, president of Chetan Sharma Consulting, said in a recent research note. “Carriers who have experienced more postpaid-to-prepaid shift will have to make up for the lost revenues someplace else.” By focusing on postpaid, Verizon is bypassing a potential windfall in new subscribers, but it is also preserving a more attractive subscriber mix for posterity.

At the conference, Killian also said Verizon doesn’t expect to see any of the economies of scale from its recent Alltel acquisition until later this year. VZW is in the process of converting the first of four separate billing systems this quarter, after which the operator will see some cost savings. Verizon has said it expects the Alltel acquisition to produce $1 billion in operational savings for the combined companies by the end of 2010.