In focusing solely on high-end consumers, Verizon Wireless is missing out on a potentially valuable source of subscribers in the prepaid market.

Verizon Wireless - jointly owned by Verizon Communications Inc. (VZ) and Vodafone Group PLC (VOD) - touts its network in justifying its higher prices and ability to sign most of its customers to annual service contracts. But its approach may prove to be flawed as that market shrinks and more consumers opt to stay away from contracts, particularly as thousands of them lose their jobs.

"There's good money in prepaid," said Lisa Pierce, an analyst at Forrester Research. "If someone loses their job and can't pay a monthly bill, they get out of their contract. Why not just take that customer and temporarily switch them to prepaid?" The move would keep the customer on the Verizon Wireless network, as well as generate good will, Pierce said.

Verizon Wireless has been wildly successful in attracting the best customers. Its margins are high, and the turnover rate is consistently the lowest in the industry. It's hard to argue with a track record like the one Verizon Wireless has posted in the last few years.

But tiny cracks are forming in the picture. After divestitures, Verizon Wireless added 1.2 million subscribers in the fourth quarter. Analysts noted the additions were lighter than they expected. The turnover rate, traditionally the lowest in the industry, ticked up to 1.35%.

AT&T Inc. (T), in comparison, added 2.1 million net new customers and 1.3 million net new postpaid subscribers. The carrier's turnover rate fell to 1.2%.

Denny Strigl, president and chief operating officer of parent company Verizon, told analysts that he didn't believe Verizon Wireless lost market share in the period. He blamed the increase in turnover to higher unemployment, canceled wireless aircard accounts and the disconnection of third- or fourth-line accounts, likely used by families.

"There's no evidence of people trading down on either plans or features," he said.

 
   Jobs Factor

The extent of layoffs could lead to Verizon Wireless changing its tone. This week alone, nearly 90,000 job cuts have been announced by more than a dozen companies. More are expected to come. If even a fraction of those left unemployed are Verizon Wireless customers, that could result in higher turnover and fewer subscriber additions.

As a consequence, prepaid providers such as Leap Wireless Inc. (LEAP), MetroPCS Communications Inc. (PCS), Virgin Mobile Inc. (VM) and Sprint Nextel Corp.'s (S) Boost Mobile could benefit. While some offer flat-rate plans, none of them require lengthy contracts.

Verizon executives were dismissive when they were asked about the threat of prepaid service providers. Verizon Chief Financial Officer Doreen Toben said she doesn't see much of an impact. "Those customers typically don't pass our credit screens, so we don't have them to begin with," she said in an interview.

Strigl added, "We're not going to do anything differently."

Some believe Verizon Wireless is missing out on the market. AT&T has waded into the demographic. It boasted roughly 800,000 net new prepaid customers in the fourth quarter, largely from wireless reseller TracFone Wireless Inc., a unit of America Mobil SAB de CV (AMX). AT&T also markets a Go Phone prepaid service.

Verizon Wireless also offers a prepaid service, called InPulse, but it is costlier than others and isn't heavily promoted. Toben acknowledged the business isn't significant to Verizon Wireless' overall revenue.

"It's clear they have carved out their position in the market," said Craig Moffett, an analyst at Sanford C. Bernstein LLC. The economics of the prepaid market are less profitable and don't work well with Verizon Wireless' cost structure.

 
   Eye On AT&T

AT&T and Verizon Wireless - the two biggest players in the industry - have been duking it out with competing plans, high-profile phones, and boasts of network quality and speeds.

"Verizon and AT&T are focused on slugging each other out," said Pierce, of Forrester Research. "Everything else is noise."

AT&T appears to have an edge with the Apple Inc. (AAPL) iPhone 3G, which continues to attract high-end customers. Verizon Wireless countered with the touchscreen BlackBerry Storm from Research In Motion Ltd. (RIMM), but it hasn't been as successful.

But both are attracting a shrinking base of available customers. Most of the customers they want to sign up already have phones, so the game is picking off subscribers from other carriers.

"There are fewer subscribers out there as we're at higher penetration rates," said Todd Rosenbluth, an equity analyst at Standard & Poor's. "There's only so much bleeding the struggling Sprint can provide."

Even those customers who AT&T and Verizon Wireless would normally want are tightening their belts. If the economy doesn't recover this year, Verizon Wireless may start taking a hard look at the market, Rosenbluth said.

-By Roger Cheng, Dow Jones Newswires; 201-938-2020; roger.cheng@dowjones.com

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