Verizon Steps Up; Buys Tracfone

Verizon is buying prepaid mobile phone operator Tracfone in the latest seismic shift in the U.S. mobile market. The deal, reportedly worth $6.25 billion, will add 21 million subscribers to Verizon’s base and – far more importantly – strengthen Verizon’s prepaid portfolio which has always been relatively weak compared to the other major carriers. T-Mobile has Metro, AT&T has Cricket and now, Verizon will have Tracfone.

But it’s not quite as simple as that: while Verizon is adding 21 million subscribers, it was already making money off a large number of these (13 million) subscribers through a wholesale agreement with Tracfone, which does not own its own network, but rather wholesales from the main carriers. So the increased Verizon subscriber base will not result in quite as much revenue as a simple one plus one merger. That being said, with nearly two-thirds of the Tracfone base already using Verizon-compatible devices, the headache of merging the Tracfone customer base into the Verizon fold is significantly lower than a typical carrier merger would be. At the same time, the other carriers will take a hit in wholesale revenue, as both AT&T and the new T-Mobile also have wholesale agreements to support Tracfone and we can expect those to disappear at some point soon after the merger’s consummation, impacting both carriers’ bottom lines. Further, we can expect Verizon to come out of the acquisition process with guns a-blazing, upgrading Tracfone’s available network (5G anyone?) and generally making the carrier even more competitive.

While the deal will certainly increase pressure on T-Mobile and AT&T, the biggest impact may be felt by Dish, which now owns the Boost Mobile brand. Still in the process of developing a comprehensive mobile strategy, Dish will probably face a more aggressive prepaid focus from Verizon, as well as from the other two major networks looking to defend their turf against potential moves from the combined Tracfone/Verizon entity.

But that is likely 12 months from now, so Dish should have time to benefit from any upheaval caused by the merger. It could be a case of a short-term benefit (for Dish) with a longer term concern. In that case, it comes down to how quickly Dish can react to this news to make the most of any opportunity. And, of course, let’s not forget the obligatory regulatory hurdles that Verizon and Tracfone must overcome. But that should be a relatively smooth process: yes, this takes a competitor out of the market, but Tracfone does not own its own network so it could be argued that as a virtual operator the impact is less on the competitive landscape. Time will tell.