In the wake of Hurricane Sandy, which disrupted telecommunications in the eastern United States, Verizon Wireless has introduced a new service designed to provide backup internet connectivity in the event wired data access is interrupted. The LTE-enabled router box manufactured by CradlePoint – which is available in versions for WAN and LAN networks – delivers Wi-Fi, encryption and other security features, and can be dropped into any existing network seamlessly. The contract-based service costs US $10 per month, and includes 25 MB of data. Any overage above the 25 MB allowance is charged at the rate of $10 per GB.
We congratulate Verizon for introducing this novel and creative solution, and encourage other operators to emulate it, if feasible. We like this plan because it is structured to generate recurring revenue with attractive margins, given that the incremental cost associated with providing it is relatively insignificant. Moreover, this type of “failover” service will not eat into network capacity, except in those rare and transient circumstances when it is actually needed.
Essentially, Verizon has created an insurance policy for subscribers who are concerned about potentially losing internet connectivity. However, unlike a typical insurance company, Verizon will not incur losses when the insured looks to collect on the policy. Instead, it is the insured that must pay. That is because, at 25 MB, the data allowance is so small that any subscriber seeking to maintain a reasonable level of internet connectivity will have to pay an additional $10 per GB to do so.
Verizon’s offer, therefore, has all the hallmarks of a winner. It produces high margin, recurring revenue, with the potential for generating even more revenue in the relatively unlikely event it is ever used. And, it does not tax the network. While this approach does not qualify in our view as a higher value-added service, such as Cloud services or proprietary apps, it certainly represents an intriguing and innovative way to generate high margin revenue. We believe it also has the potential to lock in subscribers longer term, similar to the way many policyholders stay with the same insurance company for years, if not decades.