Overall, Verizon brought in $29.4 billion in revenues for the quarter, and posted a 15 percent year-over-year increase in profits.

Verizon’s LTE network now covers 491 markets and 287 million people, which is roughly 95 percent of its current 3G footprint. CFO Fran Shammo said it plans to match 4G coverage to its 3G coverage by the end of this quarter, and he reiterated Verizon’s plans to start building its second 4G network this year over recently acquired Advanced Wireless Services (AWS) airwaves. Shammo said Verizon would start offering its first LTE-only devices – with no CDMA fallback – next year, which should coincide with the launch of its voice-over-LTE service.

Verizon saw 5.9 million LTE device activations in the first quarter, bringing its total 4G retail connections to 26.3 million, about 28 percent of its total contract subscribers. Shammo said roughly half of Verizon’s 4 million iPhone activations were for the LTE-capable iPhone 5.

As more customers upgrade to LTE devices, more of Verizon’s data load moves over to its high-capacity networks: 54 percent of its data traffic is now on LTE, compared to 50 percent in the fourth quarter.

The mix of Verizon’s mobile subscribers is also getting interesting. It’s been moving a big chunk of its customer base over to its new shared data plans since it implemented the tiers last year. About 30 percent of Verizon’s accounts are on a Share Everything plan, and the carrier is averaging 2.67 devices per account. But Verizon also acquired 43,000 net new prepaid subscribers. That’s not a huge number in the world of prepaid, but Verizon has been focusing a lot more attention on the budget segment lately, particularly as its 3G network starts to empty.

Shammo said that while Verizon isn’t getting overly aggressive in prepaid, it’s by no means ignoring it. “We will look for niches in which we can make an impact,” he said.

On the wireline side, Verizon continued to recalibrate its business toward FiOS. Its fiber service now accounts for 69 percent of all consumer revenue. Verizon added 188,000 FiOS internet subscribers and 169,000 TV subscribers. Meanwhile, Verizon shed another 89,000 DSL subscribers.

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Those iPhone sales represent a 17 percent increase over the 2.3 million Verizon sold in last year’s second quarter, its first full quarter as an iPhone distributor. In the first quarter, Verizon sold 3.2 million of the devices. But at the beginning of the year the iPhone 4S was still relatively new, while in the spring and early summer anticipation started building for the new iPhone being released this fall.

Verizon’s results almost certainly prove wrong William Blair analyst Anil Doradla’s report that Motorola’s Droid Razr was outselling the iPhone 4S at Verizon, making it the carrier’s top device. Unless a disproportionate number of Verizon customers eschewed the iPhone 4S in favor of the iPhone 4 or the vast majority of Android smartphone sales were for the Razr Maxx, the math just doesn’t work.

Though the iPhone remained dominant, Verizon still made a lot of progress toward migrating its customer base to 4G. Verizon activated 3.2 million LTE devices in total, including tablets, modems and hotspots; and 42 percent of all smartphones sold contained an LTE radio. Verizon CFO Fran Shammo said 18 percent of Verizon’s smartphone base now is on the 4G network. And given that Verizon’s smartphone penetration is now 50 percent, that means it has managed to convert nearly 10 percent of its subscriber base to 4G in a little more than a year.

On Wednesday, Verizon added another 33 smaller markets to its 4G footprint and expanded its networks in 32 markets, bringing its total coverage to 337 cities and roughly 75 percent of the U.S. population. Verizon plans to close the year with 400 markets covered.

As Shammo pointed out on the call, LTE is a far more efficient mobile broadband technology than CDMA, offering not just greater speeds but much more overall capacity. But if LTE is really Verizon’s future it will need to accelerate its 4G conversion rate, which will be awfully difficult until Apple ships an LTE version of the iPhone. It doesn’t help either that Verizon is making exceptions for old friends like RIM, which just introduced a new 3G-only BlackBerry on Big Red’s network.

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Verizon ended unlimited data last summer, but it also grandfathered its old all-you-can-eat customers into their $30 plans in perpetuity. That practice now seems to be ending. Shammo said that Verizon will launch its data share service in mid-summer, which would eliminate the single device/single data plans it offers today. But Shammo added that those shared plans would be the only tiers it offers for 4G customers, meaning anyone upgrading from a 3G to 4G device would have to discard their unlimited plan and sign up for a monthly data tier, according to Fierce.

We’re not sure how this affects customers who carried their unlimited 3G plans over to 4G devices. Nor do we know if Verizon plans to shut down unlimited for all of its customers, even if they stick with 3G devices. It will be increasingly hard for them to do so, however, since Verizon plans to stop selling 3G-only devices and turn its entire smartphone portfolio 4G. We’re still trying to get more details from Verizon and will update when we know more.

Update: Well, we heard back from Verizon, but didn’t get much. A spokesperson said she had no comment beyond what Shammo said in his speech. We’ll probably have to wait for Verizon to officially announce the share plan before we know more. What we do know is that this will affect a lot of customers. Verizon has sold an awful lot of 3G smartphones in the last few quarters, and while it doesn’t report how many of those customers are grandfathered into unlimited plans, AT&T provides a useful point of comparison. Last quarter AT&T reported that 39 percent of its smartphone customers were still on unlimited plans. AT&T ended all-you-can-eat 13 months before Verizon, so it’s had a lot more time to shift customers over to data tiers.

Update 2: Verizon Wireless issued a statement late Wednesday. Though it didn’t address the phasing out of unlimited directly, it did confirm that any overhaul it’s pricing structures would be linked directly to the introduction of shared data plans:

As we have stated publicly, Verizon Wireless has been evaluating its data pricing structure for some time. Customers have told us that they want to share data, similar to how they share minutes today. We are working on plans to provide customers with that option later this year.

We will share specific details of the plans and any related policy changes well in advance of their introduction, so customers will have time to evaluate their choices and make the best decisions for their wireless service. It is our goal and commitment to continue to provide customers with the same high value service they have come to expect from Verizon Wireless.

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On April 19, Verizon Wireless surprised many people by announcing that it would sell its 700MHz A-and B-block holdings if the Federal Communications Commission approves its proposed $3.9 billion purchase of SpectrumCo and Cox Communications’ Advanced Wireless Spectrum (AWS) holdings (as well as a smaller spectrum swap with Leap Wireless). This comes despite Verizon’s recent well-publicized assertions that it will start running out of LTE capacity by 2013 if it doesn’t get approval for the SpectrumCo deal. That’s led some of us to wonder whether Verizon is really as short on spectrum as it claims.

However, what’s more intriguing is whether Verizon can actually pull off this sale and meet Verizon CFO Fran Shammo’s claims on its Q1 2012 results call that Verizon will be able to get a “return” on its original investment:

“I think there were some articles written that this is going to be a fire sale. This is nothing near a fire sale. We bought this spectrum back in 2008. We’ve had carrying costs, and we will be prudent to our shareholders to make sure we get the return our investments. We know what the value of this spectrum is in the free market, and obviously, we’re going to an auction to allow many different parties to participate through a third-party auctioneer. And look, if we don’t get the price that we think is a fair price, then we won’t go through with the sale, and that’s at our discretion.”

As Public Knowledge’s Harold Feld points out, Verizon is making as an incredibly smart move to wrong-foot both its competitors and the FCC. In as single stroke it can get its SpectrumCo transaction approved without allowing smaller competitors to close the “spectrum gap” between themselves and AT&T and Verizon. Moreover, if the FCC allows Verizon to set a reserve price on its 700 MHz licenses based on its apparent intention to make a profit over what was paid in 2008, it is possible that Verizon may be able to get its AWS while keeping many of the A-and B-block licenses it claims to be sacrificing. Verizon paid relatively high prices for those licenses in 2008, and it is far from clear whether smaller competitors are in a position to pay more for these licenses today than they were prepared to bid back in 2008.

Verizon’s spectrum, block by block

If we take out the Chicago A-block license that is being swapped with Leap, then Verizon is selling a total of 1.65 billion MHz-POPs (The total megahertz of spectrum multiplied by the population covered) of A-block spectrum, which cost $2.42 billion in the auction, or $1.46 per MHz-POP, plus a further 556 million MHz-POPs of B-block spectrum, which cost it $2.05 billon, or $3.69 per MHz-POP. The Leap transaction provides one potential benchmark for a sale of 700MHz A-block spectrum. Verizon is reportedly valuing it at $204M, or $1.65 per MHz-POP, which would be a 34 percent premium over the $152 million that Verizon Wireless paid for this license in the 2008 auction. But since this deal involves a spectrum swap, and not a cash transaction, neither side had any incentive to reduce the price of these assets. When looking at the much bigger sale now being proposed by Verizon, we need to consider who has a need for this spectrum and what they might be prepared to pay.

As many have indicated, AT&T is the most obvious potential buyer, but it is important to realize that AT&T didn’t buy any A-block spectrum in the 2008 auction and has objected vehemently to making its LTE phones compatible with the A block, due to interference concerns. As a result, AT&T would hardly be likely to undermine its arguments to the FCC by buying this spectrum. AT&T would clearly be interested in the B block, where it bought a total of 2.1 billion MHz-POPs of spectrum in the 2008 auction for $6.64 billion ($3.15/MHz-POP). Of course this was to complement the 2.4 billion MHz-POPs of Aloha 700 MHz spectrum that AT&T bought beforehand for only $2.5 billion ($1.06/MHz-POP).

In other words, AT&T’s current 700MHz spectrum holdings cost only $2.05 per MHz-POP (a 44 percent discount to what Verizon paid for the B-block) and even AT&T’s B-block auction purchases cost 15 percent less than Verizon paid. It’s easy to see why this is the case: Verizon’s auction strategy in the B-block involved pushing up the price AT&T had to pay, before switching to the much cheaper upper C-block (where the price of only $0.76 per MHz-POP was kept low by the open access conditions imposed by the FCC at Google’s behest). So the licenses that Verizon was left with in the lower B-block were mainly the ones on which AT&T was unwilling to outbid it.

The classic example is Chicago. In the Windy City, Verizon paid $892M for a license covering 97M MHzPOPs, which works out to be $9.16 per MHz-POP, a substantial premium over other licenses. If AT&T wasn’t willing to exceed that price in 2008, it probably isn’t willing to do so today. While AT&T may be willing to pick up a number of the other B-block licenses at close to the prices Verizon paid, Verizon may well be left holding at least the expensive Chicago license unless it is prepared to sell this license at a substantial discount.

Do we have an A-block problem?

Verizon also faces a challenge to achieving a profitable sale in the A block. At this point in time there is uncertainty over the outcome of the FCC’s 700MHz interoperability proceeding, which could require AT&T to make its phones compatible with the A-block. That would boost the value of the A-block spectrum considerably, making it easier for smaller lower 700 MHz holders to get phones and roam on AT&T’s networks. However, Verizon paid far more than most other bidders those licenses back in the 2008 auction. While Verizon paid $1.46 per MHz-POP for it’s A-block spectrum, the other winners of A-block licenses paid only $0.79 per MHz-POP).

Of course, Verizon’s licenses cover far more attractive urban markets, but the big cities are the areas most subject to interference caused by neighboring Channel 51 TV broadcast stations. In addition there are relatively few bidders: T-Mobile has implicitly said that it is not interested, Sprint is not in a position to buy more spectrum, Leap probably can’t afford it, and Dish Network has bought all the spectrum it needs for a network buildout. That leaves us with MetroPCS (which bought the Boston A-block license in the 2008 auction for $313M, or $3.28 per MHz-POP), but MetroPCS has little reason to pay a premium for this spectrum if it isn’t feeling any immediate competitive pressure from other wireless operators to up its bid.

The outcome of the auction may therefore be significantly affected by how the FCC decides to approach the proposed sale. The FCC could allow Verizon to make a voluntary sale (which may then be predicated Verizon turning a profit on the spectrum – potentially causing licenses to go unsold), or it could impose a condition that this spectrum must be sold within a defined period after completion of the AWS transactions. If it’s the former, Verizon may well get it’s cake and eat it, too. If it’s the latter, the dynamic would change significantly, giving bidders like AT&T and MetroPCS much more leverage to negotiate on price. As a result, if Verizon was forced to sell all of the 700 MHz spectrum within a certain time frame, it could wind up taking a significant loss, raising questions about whether buying this spectrum was really such a good investment after all.

Tim Farrar is President of Telecom, Media and Finance Associates, a consulting and research firm in Menlo Park, CA, which specializes in technical and financial analysis across the satellite and telecom sectors.

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Verizon Wireless has no plans to lower prices on its smartphone data plans. In fact, Verizon plans to milk as much revenue from its 3G and LTE networks as possible, saying on its fourth quarter financial results call Tuesday it would establish itself as the “premium” carrier in the data market, charging its customers for quality.

That’s a bold statement considering Verizon suffered a string of LTE outages in December, challenging the credibility of its claim to be the nation’s “most reliable network.” But in general, playing up service quality has always worked for Verizon. It tends to be the highest-priced carrier of the big four, while its consumer perception ratings remain high. I’m just not sure it can maintain such a staunch stance for very long given the realities of the hyper-competitive smartphone market. A premium strategy might work if Verizon customers were all on 4G, but the majority of customers are still gravitating toward its 3G CDMA network.

Charging 4G prices for 3G services doesn’t make sense

Over the weekend, AT&T made the odd moves of both raising its data rates and boosting the ceilings on its data caps, giving new customers a better deal per megabyte consumed while almost guaranteeing they would pay higher bills than their predecessors. A new customer on AT&T will now get 1 GB, or 50 percent more data on a standard $30 plan than the same customer on Verizon. T-Mobile already far undercuts AT&T and Verizon on data fees, while Sprint is still offering unlimited plans.

The boom in smartphones and tablets and the emergence of more bandwidth-intensive applications like video are causing average monthly data consumption to skyrocket. The other operators have begun responding, not necessarily by dropping rates, but offering bigger buckets of data for the same price. Verizon seems to feel it’s immune to those price pressures. CFO Fran Shammo even stated Verizon views its data customers as occupying a high-end niche in the market.

“It’s important to note that we are a premium-priced product,” Shammo said. “We will continue to win in the market just like we did with Unleashed [prepaid data plans] even though that was priced $10 above the market. We now see that there are niches of people that want to be on the best network in the world.”

If Verizon’s data customers were only the upper echelon of smartphones users, they would all be flocking to the 4G network, but they’re not exactly coming in droves. Verizon sold 2.3 million LTE smartphones, tablets and mobile hotspots in the quarter, which seems like a lot, but not when you compare it the 7.7 million total smartphones it sold over the holidays.

Apple messes with the math. A lot of those sales were due to 4.2 million activations of iPhone 4 and 4S, which are 3G-only devices. That leaves 3.5 million smartphones, most of which were Android devices. That probably accounts for the vast majority of Verizon’s 4G activations, but it still leaves around 1 million customers who opted to get 3G phones when a 4G one was available, even though the data plan pricing for both networks remains the same. The trend was even more pronounced in the third quarter when three-quarters of all new Android device sales were in the 3G category.

The point I’m trying to make here is Verizon is still primarily a 3G operator today, and its 3G network is rather slow one at that. Unless there is a rapid shift of customers to 3G to 4G, Verizon will a hard to time justifying its high prices while its competitors drop their rates.

Will Apple come to the rescue?

Verizon does seem to be taking steps to nudge its customers over to 4G. By the end of 2011, its LTE network covered about two-thirds of the population, and it said Tuesday the 4G network will mirror its 3G network by mid-2013. LTE phones also cost more than their 3G LTE counterparts. While Shammo said Verzion won’t cut plan rates, Verizon expects LTE device prices to come down. Customers may soon have little choice but to buy a 4G phone. Verizon declared at CES it would no longer accept any smartphones that don’t have 4G connectivity.

The biggest factor in driving customers to 4G will be the launch of an LTE iPhone, which seems more and more likely this year considering the noises the operators are making. But if no LTE iPhone is forthcoming, Verizon will be in a difficult spot. It would wind up selling the most popular smartphone in the country coupled with the highest priced data plans, while simultaneously giving those iPhone customers slower network speeds and fewer gigabytes to consume. That hardly sounds like a premium service to me.

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The sales of Apple’s device is actually not all that beneficial in the immediate future for Verizon itself, which is predicting a narrower profit margin because of all the upfront costs of subsidizing that many devices. For customers who sign up for a new contract to get reduced pricing on an iPhone, Verizon must pay the additional costs to Apple, with the idea being that the carrier will recoup those costs in service and usage fees over the course of a customer’s contract. Verizon indicated during the conference that it does expect iPhone margins to improve, though it didn’t provide a specific timeframe for when this would occur.

Sales more than doubling at one of its major U.S. carrier partners is definitely good news for Apple, both in the near- and long-term. Analysts have been predicting upward of 30 million iPhones sold for Apple’s holiday quarter, which would be almost double the 17 million it sold during the previous quarter. Apple reports its results for that quarter on Jan. 24, so that’s when we’ll find out for sure whether it met or exceeded those lofty expectations.

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