Verizon Wireless 2012 Annual Report Download - page 25

• In 2011, Verizon Wireless entered into commercial agreements, modi-
fied in 2012, with affiliates of Comcast Corporation, Time Warner Cable,
Bright House Networks and Cox Communications Inc. (the cable com-
panies). Through these agreements, the cable companies and Verizon
Wirelessbecameagentstosellcertainofoneanother’sproductsand
services and, over time, the cable companies will have the option, sub-
ject to the terms and conditions of the agreements, of selling Verizon
Wireless service on a wholesale basis.
• In 2011, we acquired Terremark Worldwide Inc. (Terremark), a global
provider of information technology infrastructure and cloud services.
This acquisition enhanced our competitive position in managed
hosting and cloud services offerings to business and government
customers globally and is contributing to our growth in revenues.
Additionally, in 2011, we acquired a provider of cloud software tech-
nology, which has further enhanced our offerings of cloud services.
We expect our provisioning of cloud services to be instrumental to
our future growth as it allows us to meet the evolving demands of our
customers.
Investing in innovative technology like wireless networks, high-speed
fiber and cloud services has positioned Verizon at the center of the
growth trends of the future. By investing in our own capabilities, we are
also investing in the markets we serve by making sure our communities
have an efficient, reliable infrastructure for competing in the information
economy. We are committed to putting our customers first and being a
responsible member of our communities. Guided by this commitment
and by our core values of integrity, respect, performance excellence and
accountability, we believe we are well-positioned to produce a long-term
return for our shareowners, create meaningful work for ourselves and
provide something of lasting value for society.
During 2012, we purchased a single premium group annuity contract
from The Prudential Insurance Company of America and Prudential
FinancialInc.
In the sections that follow, we provide information about the important
aspects of our operations and investments, both at the consolidated and
segment levels, and discuss our results of operations, financial position
and sources and uses of cash. In addition, we highlight key trends and
uncertainties to the extent practicable.
Trends
We expect that competition will continue to intensify with traditional,
non-traditional and emerging service providers seeking increased market
share. We believe that our networks differentiate us from our competi-
tors, enabling us to provide enhanced communications experiences to
our customers. We believe our focus on the fundamentals of running a
good business, including operating excellence and financial discipline,
gives us the ability to plan and manage through changing economic
conditions. We will continue to invest for growth, which we believe is the
key to creating value for our shareowners.
Connection and Operating Trends
In our Wireless segment, we expect to continue to attract and main-
tain the loyalty of high-quality retail postpaid customers, capitalizing
on demand for data services and bringing our customers new ways of
using wireless services in their daily lives. We expect that future connec-
tion growth will continue as we introduce new smartphones, Internet
devices such as tablets and our suite of 4G LTE devices. We believe these
devices will attract and retain higher value retail postpaid connections,
contribute to continued increases in the penetration of data services and
keep our device line-up competitive versus other wireless carriers. We
expect future growth opportunities will be dependent on expanding the
penetration of our network services, offering innovative wireless devices
for both consumer and business customers and increasing the number
of ways that our customers can connect with our network and services.
In recent years, we have experienced continuing access line losses in our
Wireline segment as customers have disconnected both primary and
secondary lines and switched to alternative technologies such as wire-
less, VoIP and cable for voice and data services. We expect to continue
to experience access line losses as customers continue to switch to alter-
nate technologies.
Despite this challenging environment, we expect that we will continue to
grow key aspects of our wireline business by providing superior network
reliability, offering innovative product bundles that include high-speed
Internet access, digital television and local and long distance voice ser-
vices, offering more robust IP products and service, and accelerating our
cloud computing strategy. We will also continue to focus on cost effi-
ciencies to attempt to offset adverse impacts from unfavorable economic
conditions and intense competitive pressure.
Operating Revenue
We expect to experience service revenue growth in our Verizon Wireless
segment in 2013, primarily as a result of continued growth in postpaid
connections driven by increased sales of smartphones and other data-
capable devices. We expect that retail postpaid average revenue per
account(ARPA)willcontinuetoincreaseasconnectionsmigratefrom
basic phones to smartphone devices and as the average number of con-
nections per account increases which we expect to be driven by our new
Share Everything plans that allow for the sharing of data among up to 10
devices. We expect that our future service revenue growth will be sub-
stantially derived from an increase in the sale and usage of innovative
wireless smartphones and other data-capable devices in addition to our
new pricing structure that will encourage customers to continue adding
data-enabled devices onto existing accounts.
During 2012, we experienced an increase in Wireless equipment and other
revenue as a result of sales of new smartphone devices, including our 4G
LTE-capable devices. We expect that continued emphasis on increasing
smartphone penetration will positively impact equipment revenue as
these devices typically carry higher price points than basic phones.
WeexpectFiOSbroadbandandvideopenetrationtopositivelyimpact
our Mass Markets revenue and subscriber base and we also expect
Strategic services revenue to continue to grow as we derive additional
enterprise revenues from cloud, security and other solutions-based ser-
vices and customers continue to migrate their services to Private IP and
other strategic networking services. We believe the trend in these growth
areas as well as new offerings in telematics and video streaming will help
offset the continuing decline in revenues in our Wireline segment related
to retail voice connection losses as a result of wireless substitution as well
as the continued decline in our legacy wholesale and enterprise markets.
Operating Costs and Expenses
We anticipate our overall wireless operating costs will increase as a result
of the expected increase in the volume of smartphone sales, which will
result in higher equipment and sales commission costs. In addition, we
expectcontentcostsforourFiOSvideoservicestocontinuetoincrease.
However, we expect to achieve certain cost efficiencies in 2013 and
beyond as data traffic continues to migrate to our lower-cost 4G LTE net-
work and as we continue to streamline our business processes with a
focus on improving productivity and increasing profitability.
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MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS continued