Why Spend More Than $6.25 Billion on a Company that Primarily Resells Your Service?

  You might wonder why Verizon would pay a hefty premium to buy the U.S. wireless resale flavors of America Movil’s TracFone.  See  https://www.fool.com/investing/2020/09/14/verizon-buys-tracfone-from-america-movil-for-625-b/.  I’ll start with reference to the name of the acquired company.

Verizon gets more than a remarkably profitable revenue stream from TracFone’s 13+ million prepaid—presumably low margin--wireless subscribers. Verizon adds 13 million consumers whose commercial (and private) activities are increasingly subject to extensive surveillance.  Verizon’ ability to track the phones of 13+ million new customers has the potential for substantially adding revenue well beyond the relatively paltry monthly payments for resold cellphone service.

Perhaps belatedly, Verizon recognizes that it has less to gain in targeting and pitching the few higher margin, post-paid wireless subscribers than in acquiring a vast treasure trove of new consumers available for targeting and pitching lots of products and services.  Smartphones have become trackable devices for location-based marketing, data collection and mining and cross-promotion.

Verizon has implemented a part of Amazon’s strategic planning.  Amazon sells Kindles and Fire tablets, probably at a small loss.  The company easily recovers its investment as consumers owning Amazon devices typically become higher volume purchasers than consumers who interact with the company via other devices.

I learned the hard way about Amazon’s cross promotional strategies when I purchased an Insignia smart television set conveniently pre-loaded with a host of Amazon applications.  What I did not know was the miserly 4 Gigabyte memory capacity of the set, 75% of which Amazon occupied while denying set owners the ability to delete any of the pre-loaded apps.  Worse yet, Amazon prevents most competing and alternative apps from being downloaded to external memory inserted into a USB port.  How clever.  I inadvertently have become largely captive to Amazon content, or to ventures willing to pay Amazon for undeletable app installation.

Verizon realizes that it too can surveil (yes, another word for track) and relentlessly market to a captive customer base.  Better yet, Verizon—unlike Amazon—does not even have to discount the tracking device.  Cellphones monitor user locations so that subscribers can make and receive calls, etc. Additionally, this essential function of wireless service easily transitions to commercial surveillance and profitable marketing to third parties by wireless carriers. Bear in mind that the nonnegotiable, “take it or leave it” wireless service contract reserves for the carriers all sorts of subscriber data monetization options—at no additional compensation to the subscriber. 

Verizon gets two additional revenue streams from its TracFone acquisition: 1) cross promotion of its services to 13 million new subscribers and 2) revenues from third parties willing to pay for marketing access.  In a nutshell, Verizon has less interest in the monthly revenue stream from pre-paid wireless access than from the variety of additional revenue streams it can generate by having a large new customer base to surveil and market.

Heretofore Verizon appeared disinclined to promote resale for fear that it would cannibalize higher margin post-paid service, despite AT&T’s successful Cricket venture.  Verizon still may have limited interest in resale revenue streams, aside from the ample new ancillary revenues likely to accrue.