Established in 2000 as a joint venture between Verizon Communications and Britain’s Vodafone, over the last 18 years Verizon Wireless has emerged as the largest and consistently most profitable enterprise in the fiercely competitive U.S. wireless service. Today, the company has over 150 million subscribers and a 36%
market share.
One of the most significant facts about Verizon is that it has the lowest churn rate in the industry.
Customer churn refers to the number of subscribers who leave a service within a given time period. Churn is important because it costs between $400 and $600 to acquire a customer (with phone subsidies accounting for a large chunk of that). It can take months just to recoup the fixed costs of a customer’s acquisition.
If churn rates are high, profitability is eroded by the costs of acquiring customers who do not stay long enough to provide a profit to the service provider.
The risk of churn increased significantly in the United States after November 2003, when the Federal Communications Commission (FCC) allowed wireless subscribers to transfer their phone numbers when they switched to a new service provider. Over the next few years, Verizon Wireless emerged as the clear winner in the battle to limit customer defections. For example, in early 2018, Verizon’s churn rate was 1.18%
per month, compared to a rate of 1.32% at AT&T, 2.39% at Sprint, and 2.42% at T-Mobile. Verizon’s low churn rate has enabled the company to grow its subscriber base faster than its rivals, which allows the company to better achieve economies of scale by spreading the fixed costs of building a wireless network over a larger customer base.
The low customer churn at Verizon is due to a number of factors. First, it has the most extensive network in the United States, blanketing 95% of the nation.
This means fewer dropped calls and dead zones as compared to its rivals. For years, Verizon communicated its coverage and quality advantage to customers with its “Test Man” advertisements. In these ads, a Verizon Test Man wearing horn-rimmed glasses and a Verizon uniform wanders around remote spots in the nation asking on his Verizon cell phone, “Can you hear me now?” Verizon claims that the Test Man was actually the personification of a crew of 50 Verizon employees who each drive some 100,000 miles annually in specially outfitted vehicles to test the reliability of Verizon’s network.
Second, the company has invested aggressively in high-speed wireless networks, including most recently 4G LTE, enabling rapid download rates on smartphones.
Complementing this, Verizon has a high-speed, fiber-optic backbone for transporting data between cell towers. Verizon has invested some $150 billion in its wireless and fiber-optic network since 2000. The company also looks set to be a leader in next generation 5G wireless networks, set to start rolling out in 2019, that will have download rates up to 1,000 times faster than 4G networks. For customers, this means a high-quality user experience when accessing data such as streaming video on their smartphones. To drive this advantage home, in 2011, Verizon started offering Apple’s marketleading iPhone in addition to the full range of Android smartphones it was already offering (the iPhone was originally exclusive to AT&T).
To further reduce customer churn, Verizon has invested heavily in its customer care function. Its automated software programs analyze the call habits of individual customers. Using that information, Verizon representatives will contact customers and suggest alternative plans that might better suit their needs. For example, Verizon might contact a customer and say, “We see that because of your heavy use of data, an alternative plan might make more sense for you and help reduce your monthly bills.” The goal is to anticipate customer needs and proactively satisfy them, rather than have the customer take the initiative and possibly switch to another service provider.
Surveys by J.D. Power have repeatedly confirmed Verizon’s advantages. A J.D. Power study ranked Verizon best in the industry in terms of overall network performance. The ranking was based on a number of factors, including dropped calls, late text message notifications, Web connection errors, and slow download rates. Another J.D. Power study looked at customer care in three customer contact channels—telephone, walk-in (retail store), and online. Again, Verizon had the best score in the industry, reflecting faster service and greater satisfaction with the efficiency with which costumer service reps resolved problems. This advantage has not only enabled Verizon to reduce its churn rate, it has also supported higher service prices than its rivals. In the face of intense competition for customers, Verizon charges 20 to 25% more than other wireless providers.
In addition to its market leading customer churn numbers, Verizon has an advantage based on economies of scale. It is able to spread its massive fixed costs for infrastructure over the largest subscriber base in the industry. Estimates suggest that Verizon’s cost of service per connection run at about $6 per month, while T-Mobile and Sprint spend about $9 and $13 per connection, respectively. Verizon also appears to have lower SG&A expenses per connection.
These are about $15 a month at Verizon, versus $18 at T-Mobile. The company is continuing to drive down network delivery costs and SG&A expenses through ongoing initiatives such as network virtualization and higher digital customer service engagement.

Questions
1. What resources underlie Verizon’s strong competitive position in the U.S. wireless telecommunications industry?
2. Explain how these resources enable Verizon to improve one or more of the following: efficiency, quality, customer responsiveness, innovation.
3. Apply the VRIO framework discussed in chapter 3 and describe to what extent these resources can be considered valuable, rare, inimitable, and well organized.
4. What must Verizon do to maintain its competitive advantage going forward in the increasingly competitive U.S. wireless telecommunications industry?