Verizon charging 4G prices but selling a lot of 3G phones

Verizon Wireless(s vz)(s vod) has no plans to lower prices on its smartphone data plans. In fact, Verizon plans to milk as much revenue from its 3G and LTE networks as possible, saying on its fourth quarter financial results call Tuesday it would establish itself as the “premium” carrier in the data market, charging its customers for quality.
That’s a bold statement considering Verizon suffered a string of LTE outages in December, challenging the credibility of its claim to be the nation’s “most reliable network.” But in general, playing up service quality has always worked for Verizon. It tends to be the highest-priced carrier of the big four, while its consumer perception ratings remain high. I’m just not sure it can maintain such a staunch stance for very long given the realities of the hyper-competitive smartphone market. A premium strategy might work if Verizon customers were all on 4G, but the majority of customers are still gravitating toward its 3G CDMA network.

Charging 4G prices for 3G services doesn’t make sense

Over the weekend, AT&T (s t) made the odd moves of both raising its data rates and boosting the ceilings on its data caps, giving new customers a better deal per megabyte consumed while almost guaranteeing they would pay higher bills than their predecessors. A new customer on AT&T will now get 1 GB, or 50 percent more data on a standard $30 plan than the same customer on Verizon. T-Mobile already far undercuts AT&T and Verizon on data fees, while Sprint(s S) is still offering unlimited plans.
The boom in smartphones and tablets and the emergence of more bandwidth-intensive applications like video are causing average monthly data consumption to skyrocket. The other operators have begun responding, not necessarily by dropping rates, but offering bigger buckets of data for the same price. Verizon seems to feel it’s immune to those price pressures. CFO Fran Shammo even stated Verizon views its data customers as occupying a high-end niche in the market.
“It’s important to note that we are a premium-priced product,” Shammo said. “We will continue to win in the market just like we did with Unleashed [prepaid data plans] even though that was priced $10 above the market. We now see that there are niches of people that want to be on the best network in the world.”
Verizon iPhone 4If Verizon’s data customers were only the upper echelon of smartphones users, they would all be flocking to the 4G network, but they’re not exactly coming in droves. Verizon sold 2.3 million LTE smartphones, tablets and mobile hotspots in the quarter, which seems like a lot, but not when you compare it the 7.7 million total smartphones it sold over the holidays.
Apple(s aapl) messes with the math. A lot of those sales were due to 4.2 million activations of iPhone 4 and 4S, which are 3G-only devices. That leaves 3.5 million smartphones, most of which were Android(s goog) devices. That probably accounts for the vast majority of Verizon’s 4G activations, but it still leaves around 1 million customers who opted to get 3G phones when a 4G one was available, even though the data plan pricing for both networks remains the same. The trend was even more pronounced in the third quarter when three-quarters of all new Android device sales were in the 3G category.
The point I’m trying to make here is Verizon is still primarily a 3G operator today, and its 3G network is rather slow one at that. Unless there is a rapid shift of customers to 3G to 4G, Verizon will a hard to time justifying its high prices while its competitors drop their rates.

Will Apple come to the rescue?

Verizon does seem to be taking steps to nudge its customers over to 4G. By the end of 2011, its LTE network covered about two-thirds of the population, and it said Tuesday the 4G network will mirror its 3G network by mid-2013. LTE phones also cost more than their 3G LTE counterparts. While Shammo said Verzion won’t cut plan rates, Verizon expects LTE device prices to come down. Customers may soon have little choice but to buy a 4G phone. Verizon declared at CES it would no longer accept any smartphones that don’t have 4G connectivity.
The biggest factor in driving customers to 4G will be the launch of an LTE iPhone, which seems more and more likely this year considering the noises the operators are making. But if no LTE iPhone is forthcoming, Verizon will be in a difficult spot. It would wind up selling the most popular smartphone in the country coupled with the highest priced data plans, while simultaneously giving those iPhone customers slower network speeds and fewer gigabytes to consume. That hardly sounds like a premium service to me.