In the third quarter of 2018, Verizon (NYSE: VZ) showed another major annual increase in equipment sales. It proves that rising smartphone prices can lift handset manufacturers like Apple (NASDAQ: AAPL) again as they have throughout the year. But Verizon and Alphabet s (NASDAQ: GOOGL) (NASDAQ: GOOG) Google uses the rising prices to become aggressive with campaigns. The strategy can be a blessing for both companies.
Expensive smartphones and make a break
Verizon's sales of wireless segment equipment increased by 23% in the third quarter and is now up 24.4% so far this year compared with 201
If you swallow high prices, it's unpleasant, but Verizon runs a buy-one-get-one-free campaign on Google, Samsung and Apple phones. The agreement works for new and existing customers – although existing customers must open a new line of purchase to qualify. The phones must also be purchased via a deduction plan. Verizon will credit the monthly payment on statements, which will help the company spread the cost of the free phone over time.
Of the three BOGO offers, Google is the most aggressive. Going with Apple means a free iPhone XR – the cheapest new model – or a $ 750 credit against another Apple phone. The Samsung deal is on Galaxy Note 9, starting at $ 999, and comes with a $ 999 credit against another Note 9.
For the Google Pixel 3 and 3 XL, it's also a buy-one-get-one for equal or lesser value. Google's new devices already undermine the competition, but start with $ 799 for Pixel 3 and $ 929 for 3 XL. Plus, along with the other free phone, Verizon also launches a free Pixel tripod with each phone – a wireless charging station powered by Google Assistant, which basically makes the phone a smart home hub. A Pixel Stand sells for $ 79 right now, so it's another $ 158 value that Google throws into Verizon carts.
More subscribers, for mobile and software
The big jump in equipment sales this year has been nice for Verizon shareholders, but equipment sales are a less profitable business than wireless subscriptions. In addition, 70% of Verinson's wireless segment revenue comes from service charges. Offering free phones is a great way to move the needle there.
Changes in service revenues are driven by new customer purchases, fluctuations in average per capita income, and churn, where customers go for greener pastures. Although the company has had to become aggressive with its campaigns due to strong competition from other telecom, Verizon clearly has a strong growth in net subscriber grants this year. There were 515,000 net wireless additions in the third quarter.
For Google, the BOGO campaign can also be good for its business. The Pixel family of phones is an underdog, as the smartphone market is currently dominated by Apple and Samsung. Google is a beginner, and has just brought the design process internally in the beginning of 2018.
Although hardware sales will help diversify Google's advertising-dominated moneymaking model, software is the widest opportunity in the long run. At the last Pixel event that officially introduced Pixel 3, hardware backups took back when Google showed its software and services, using the phones and a new home theater as a canvas.
Using free Pixel (and free Pixel Stands) as carrot can help introduce consumers to Google Assistant's artificial intelligence and all related capabilities that come with the Pixel family. The Internet search giant believes the platform will simplify daily tasks and improve the quality of life of the users. If it can convince them, hardware shipments may become a meaningful part of the Alphabet empire, but ad-based revenue will surely also increase.
This BOGO offer is therefore a win-win, especially for Verizon's event with Google. With the very important holiday shopping season that is close by, expect others to also become aggressive with deals, to prevent a pixel stirrer in the hardware industry.
Suzanne Frey, an Alphabet executive, is a member of The Motley Fool's Board of Directors. Nicholas Rossolillo owns shares in Alphabet (C-shares), Apple and Verizon Communications. Motley Fool owns shares of and recommends Alphabet (A-shares), Alphabet (C-shares), and Apple and is long in January 2020 $ 150 call on Apple and short January 2020 $ 155 appeals to Apple. Motley Fool recommends Verizon Communications. Motley Fool has an information rules.