Verizon Tops Rivals in Latest Wireless Carrier Survey

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Verizon Wireless has been named the top provider of mobile network service in America, according to a survey by market research firm RootMetrics. Ranking No. 1 (or tied for No. 1) in 48 states for overall performance, 44 states for reliability, 45 states for speed -- and particularly good with mobile Internet, where it tops the rankings in 46 states for data, Verizon Wireless is now officially the best mobile provider in the country.

But what about wireless's 20th Century cousin? Turns out, the news is less than happy for consumers still attached to fixed, "wireline" service.

Honey, the Internet Pipes Are Clogged Again

There's a theory floating around out there on the Internet that too many people are downloading too many movies on Netflix (NFLX) and Amazon.com (AMZN) Prime, and that all of this downloading is clogging up the Internet's "series of tubes" and creating congestion.

If that were true, then the logical -- the economic -- solution to the problem would be for ISPs to charge more for Internet access, or set limits on Internet usage and charge more for customers exceeding those limits. Such actions would curb demand for Internet access, reduce downloading activity, and unclog the pipes.

That's the theory. Now here are the facts.

Sorry, Sir. I Can't Find Anything Wrong With Your Pipes

Last week, the U.S. Government Accountability Office released the preliminary results of a survey it conducted among ISPs, industry experts and consumers regarding Internet usage and congestion. What it found was that, indeed, "some wireless ISPs" have congestion issues. And to solve the problem, they do indeed impose data usage caps and higher prices for exceeding those caps.

However, GAO also asked the major wireline ISPs -- companies like Comcast (CMCSA), AT&T (T) U-verse, and yes, Verizon (VZ) FiOS as well -- what they're seeing, Internet traffic-wise. Surprisingly, "wireline ISPs said that congestion is not currently a problem."

And yet, according to GAO, these wireline ISPs are nonetheless beginning to charge their customers based on the volume of Internet data they use, a policy known as "usage-based pricing," or UBP. So far, only about 25 percent of Internet users say they've run into UBP demands by their ISPs -- but that number seems set to increase. GAO's survey shows that seven of the top 13 wireline ISPs now impose UBP on their customers "to some extent."

The reason: UBP can generate more revenues for ISPs."

Paying the Price, for One Reason or Another

Could this mean that, even in the absence of congestion, ISPs are starting to impose UBP and charge for Internet traffic just because they can?

ISPs and other industry experts argue that they need more revenue "to help fund network capacity upgrades as data use grows." And maybe that's true. After all, ISPs forecast that wireless data traffic will grow 20 percent annually between now and 2018.

Then again, a quick look at the financial statements these companies have on file with the Securities & Exchange Commission shows that they aren't exactly hurting for revenues -- or profits -- to begin with.
  • AT&T, for example, did nearly $129 billion in business last year, and earned $18.2 billion in net profit on those revenues -- a 14.1 percent net profit margin.
  • Verizon's 2013 revenues totaled more than $120 billion, and the company earned $11.5 billion in business on these revenues -- a 9.5 percent profit margin.
  • Even Comcast, lacking the phone companies' massive wireless business as a source of sales, sold $64.6 billion worth of goods and services in 2013. Its $6.8 billion in net profit yielded a profit margin better than Verizon's, if not quite so rich as AT&T's -- 10.5 percent.
So as businesses, all three of these companies appear to have plenty of revenue already, with which "to help fund network capacity upgrades," were they so inclined. What's more, their profits are increasing at a phenomenal rate. Data from S&P Capital IQ show that net profit margins at each of Comcast, AT&T, and Verizon expanded in each of the last two years.

Follow the Money

As for what these companies actually do with the profits they earn, let's look at another example. Data from S&P Capital IQ show that Comcast's cable division in particular (Comcast also owns NBCUniversal) boasted earnings of $21.4 billion -- 41 percent of revenues -- before accounting for the costs of interest on the firm's $44 billion debt load, for taxes, depreciation and amortization costs. So most of those "EBITDA" profits were actually earmarked for paying down these costs.

And how much of Comcast's revenue was earmarked for capital spending "to help fund network capacity upgrades"? That was a much smaller figure: $5.4 billion.

Don't be surprised if in your next cable bill, they ask you to chip in to make up the difference.

Motley Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool both recommends and owns shares of Amazon.com and Netflix. Try any Motley Fool stock picking newsletter service free for 30 days.



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