Editor’s note: Tepid holiday phone additions keep Verizon’s wireless revenue in decline as competitors’ unlimited data plans limited its subscriber growth in 4Q16, says Steve Vachon, Research Analyst at Technology Business Research.

HAMPTON, N.H. – Verizon’s consolidated revenue declined 5.6% in 4Q16, largely due to the divestment of three wireline markets to Frontier Communications in April and lower wireless ARPU stemming from customers migrating to nonsubsidized pricing plans. Verizon’s wireless revenue growth was also limited by its lackluster postpaid phone net additions, which dropped to 167,000 in 4Q16 compared to 449,000 in 4Q15, as the carrier struggled to attract holiday shoppers against the newly launched T-Mobile One and Sprint Unlimited Freedom unlimited data plans.

Improving margins and profitability will take preference over revenue and subscriber growth over the next two years as the company continues to retire nonstrategic assets and business segments to fuel investments in IoT, 5G and fiber. Wireless revenue will continue to decline for the foreseeable future as Verizon focuses on retaining postpaid premium customers while T-Mobile and Sprint garner higher phone additions through their unlimited data programs. Verizon may need to re-evaluate its wireless go-to-market strategy, however, if the company continues to generate insufficient subscriber additions to maintain its margins.

Verizon exits nonstrategic segments to fuel initiatives that provide a greater ROI

Verizon is divesting nonessential assets to fund initiatives that yield a greater ROI. This trend was exemplified by the divestment of wireline markets in three states to Frontier, Verizon’s exit from the public cloud market and, most recently, the pending sale of 24 of the carrier’s data center sites to Equinix for $3.6 billion. Though selling its data centers will deprive Verizon of colocation revenue, it eliminates the burdens associated with data center ownership and provides capital to fund new investments in Internet of Things (IoT) and media.

Recent IoT acquisitions will help Verizon attract smart cities contracts as the carrier is growing its portfolio in areas such as connected lighting (Sensity Systems), telematics (Telogis and Fleetmatics) and Wi-Fi connectivity (LQD Wi-Fi). TBR anticipates Verizon will pursue additional small-scale acquisition in 2017 to gain a competitive advantage over AT&T and make greater headway in verticals including utilities, agriculture and connected health.

Though the appeal of the Yahoo acquisition has been diminished due to its security breaches, the deal is still on the table and is expected to close after April. Yahoo’s earnings performance was better than expected in 4Q16, with the company being able to increase revenue and net income year-to-year, and Yahoo reports that there has not been a significant drop in the use of its services following the disclosures of it being cyber hacked. Verizon also continues to invest in exclusive content to support its media and go90 segment. Though viewership is growing incrementally, go90 has yet to produce acclaimed original content to spark widespread usage of the platform, which is critical for the platform to gain significant traction. Additionally, Verizon released 155 go90 employees in January, indicating the platform is likely not living up to expectations.

Verizon reinforces its conservative postpaid pricing strategies in hopes of boosting wireless margins

Amid slowing postpaid phone subscriber additions, Verizon seeks to improve wireless margins via recent initiatives including raising activation rates and discontinuing offering equipment subsidies to existing customers in January 2017. Though these moves will allow Verizon to stabilize its wireless margins in 2017, eliminating postpaid contracts will likely cause an uptick in churn, as the carrier was the last holdout in eliminating the plans entirely. The move will also result in less frequent upgrades and customers opting for less expensive smartphones to offset the cost of purchasing unsubsidized devices

Verizon is re-emphasizing its prepaid segment to attract value-minded customers, refraining from undercutting T-Mobile and Sprint to gain postpaid customers. To preserve ARPU, Verizon eliminated its two lowest-tiered prepaid plans in November and is steering customers to its $50 and $70 plans that feature more data than comparable postpaid plans.