October 8, 2014
In a classic “you spoke, we listened” type of letter, Verizon (NYSE: VZ ) reversed course on its controversial network optimization policy. For those not following the story, Verizon angered many long-term users with a new policy to throttle unlimited 4G data to “make room” for new users who pay for data by the gigabyte.
Although Verizon said the restrictions would affect only the top 5% of data users and only those that are its legacy unlimited data customers, their rationale fell on deaf ears from both unlimited customers and, shockingly, the Federal Communications Commission. In fact, FCC Chairman Tom Wheeler wrote an angry letter to Verizon in response to its policy, which said “it is disturbing to me that Verizon Wireless would base its ‘network management’ on distinctions among its customers’ data plans, rather than on network architecture or technology.”
Data is more valuable than voice
For those who follow the industry closely, this makes sense — data is a huge growth market for telecoms. A recent global survey from Cisco pegs global mobile data traffic to increase nearly 11-fold between 2013 and 2018. And in the United States, our mobile data traffic is chugging along at over 60% growth over the past couple of years, according to Cisco.
So while telecoms originally had a billing scheme that provided packages based on cell-phone minutes and number of texts, they have instead chosen to treat those as near-loss leaders to focus on data plans to make money. Verizon famously axed its unlimited data plans in 2011 but allowed grandfathered customers to keep the service. What’s followed has been a contentious relationship, with Verizon seemingly begrudgingly accepting those grandfathered customers, who themselves are wary of any change of terms and/or service updates.
Enter the “throttle”
For those unlucky enough to not be grandfathered into Verizon’s $30-per-month unlimited-data plans and now find themselves shopping for a new plan from the company, its single-user data plan costs $60 with unlimited talk and text but offers only 2 GB of data, with $15 for every extra GB of data you go over. For perspective, one hour of Netflix viewing uses roughly 1 GB for standard-definition video and 3 GB for HD video.
Therefore, you can see how it’s potentially bad for the company’s bottom line if one Netflix HD viewing hour can lead to $15 of incremental revenue for certain plans if the wireless network is used versus those paying $30 for unlimited access. Verizon’s response has been to treat high-usage unlimited-data plan owners as second-class citizens of sorts by slowing their access down and allowing new, metered traffic access to faster bandwidth.
Netflix is noteworthy in both its huge data demand and subsequent deal with Verizon: The company has also taken a mini-step toward the end of net neutrality by accepting money to boost Netflix’s traffic in a “paid peering agreement” in which Netflix paid for speed increases on Verizon’s FiOS broadband network. The deal should encourage viewers to use the Internet to access Netflix versus their mobile data plans, therefore reducing strain on their mobile network.
A smart move for Verizon
In the end, this is a smart move for Verizon to abandon its plans to throttle data. Although it’s widely known that customers hold pay TV, Internet providers, and wireless companies in low regard, Verizon tends to perform rather well in each respective category. In fact, in both Internet service and wireless communication providers, Verizon’s FiOS takes first place in customer satisfaction; the company also finishes near the top of the pack in pay TV by coming in third behind DirecTV and AT&T‘s U-verse — that should be second following the AT&T/DirecTV merger.
Would Verizon investors prefer that Verizon was able to more effectively monetize those users? Sure. Data is where the growth and value is in wireless. Unfortunately, Verizon didn’t see its value until after these unlimited contracts were signed.
And while Verizon misses out on incremental revenue by continuing to honor these deals, and there is the potential for a legacy wireless deal program where lines are handed down like rent-controlled apartments, the bigger risk to the company is in losing its reputation as a top-notch provider. The company wisely decided that the loss of its reputation wasn’t worth it and that “unlimited” should mean “unlimited.”
THE ONLY THING I ASK IS “WHEN ARE THEY GOING TO STOP THROTTLING ME?”