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Why Verizon Finally Caved on the Unlimited Data Plan

For the past year, Verizon Wireless has been under all-out attack from smaller rivals Sprint and T-Mobile. The two challengers have cut prices, eliminated monthly data limits, thrown in all kinds of freebies and run some nasty ad campaigns—with Sprint even featuring Verizon’s former “Can you hear me now” pitchman Paul Marcarelli.

Lately, the brunt of the attack focused on one of the most hated features of wireless plans: limited monthly data allowances. Sprint and T-Mobile last summer introduced relatively cheap unlimited data plans, but Verizon stuck with its buckets, albeit moving to give customers bigger allowances per dollar a few times.

And that seemed to be the strategy, at least under the supervision of Verizon CFO Fran Shammo and David Small, head of wireless operations.

Then, over the past few months, Shammo retired and Small was replaced by Ronan Dunne, the former CEO of British wireless carrier O2. Now it seems the company’s whole competitive strategy is being replaced as well, with the surprise announcement on Sunday that Verizon will finally offer unlimited data plans, too. And after getting as aggressive as rivals giving away free iPhones at the holidays, Verizon brought back the offer this week for new customers who defect to the unlimited plan.

Although there are lingering questions about how Verizon’s network will handle the surge in usage from likely tens of millions of newly unlimited customers, the shift was increasingly unavoidable, given the gains competitors were making.

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Last month, Shammo’s replacement, Matt Ellis, reported fourth quarter results and had to tell investors and analysts that, contrary to earlier forecasts, Verizon’s revenue would not grow in 2017. The problem was tougher competition in the wireless market, which had already prompted Verizon to offer more data per plan and eliminate overage charges on newer plans. Asked if it was time to offer an unlimited plan, Ellis sounded more open minded than his predecessor.

“We continually monitor the market and we will see where we head in the future,” he said.

Market Share Battle

That future arrived sooner than most expected. The reason is that the competitive assault, already taking market share, intensified.

Last year, Verizon added 2.3 million regular monthly phone customers, about half what it added in 2015. Smaller competitor T-Mobile added 3.3 million of what the industry calls postpaid phone customers, the most lucrative segment in the market. And Sprint, which was still losing such customers just over a year ago, managed to add 910,000 in 2016.

Then after New Year’s at the CES show in Las Vegas, T-Mobile announced it would stop adding surcharges and taxes as add-on fees to its unlimited plan. The $70 one-line price would be the price customers actually paid, an effective 10% or more price cut given the level of extra fees being eliminated. And Sprint got even more aggressive, first cutting the price of one line of unlimited to $50 from $60 under a limited time offer, then adding a promotion of just $90 for up to five lines.

In the end, Verizon was backed into a corner and couldn’t avoid unlimited any longer, analyst Jonathan Chaplin of New Street Research tells Fortune. “I suspect subscriber trends have deteriorated further from the fourth quarter,” he says. “Bottom line, they are having a hard time competing for (subscribers) without it.”

Verizon’s competitors took different tacks after the announcement. T-Mobile CEO John Legere, among several critical tweets, went poetic in one of his responses. “Roses are magenta. Unlimited is too. You don’t know what you’re doing. Customers realize it, too.” But Sprint CEO Marcelo Claure was complimentary, tweeting to Dunne: “good move. Recognizing what consumers want is a step in the right direction. Look forward to competing at another level.”

The prospects of increasing competition and lack of growth have spooked Wall Street. Verizon’s share, which had lost almost 7% since Ellis’s fourth quarter report, lost another 1% in morning trading on Monday.

And there remains the question of network capacity. Verizon has less airwave spectrum per customer than the smaller carriers–about half what AT&T and T-Mobile have and far less than Sprint.

“There will now be increasing focus on how Verizon’s network can handle the likely traffic surge,” Morgan Stanley analyst Simon Flannery noted obliquely, pointing out that even before the new unlimited plan the carrier’s high-speed data traffic was already growing 49% in the fourth quarter versus the prior year.

However, Verizon (VZ) has spent far more than Sprint (S) and T-Mobile (TMUS) on high-tech upgrades and additional cell sites to boost efficiency. Verizon laid out over $11 billion last year on wireless infrastructure, compared with $5 billion at T-Mobile and under $3 billion at Sprint, as Dunne pointed out in a blog post on Monday.

“We’re committed to investing in everything you’ll need to connect to the promise the digital world offers- no matter how many times you stream your favorite cat video on YouTube or how many hours you spend texting your best friend about the things that matter most in your life,” Dunne wrote. “Our network isn’t just ready for what’s next. It’s ready for anything.”

For more on recent changes in Verizon wireless service, watch:

And there are ways to add spectrum, as well. Verizon has occasionally been rumored as a likely acquirer of satellite TV service Dish Network (DISH), which also owns considerable unused wireless phone spectrum. Shares of Dish were as much as 3% in morning trading on Monday. Also, the Federal Communications just concluded an airwave auction last week to repurpose airwaves currently used for TV signals, though winning bidders have not been disclosed yet.

One More Shoe

The next shoe to drop would be from AT&T. It’s postpaid phone customer growth has also been lagging, but it has also been aggressively ramping up prepaid offerings to lure the most cost-conscious consumers. As part of a more synergistic strategy, AT&T (T) does offer an unlimited wireless plan to its DirecTV satellite TV customers. So far, 8 million have signed up.

Opening up the unlimited plan to all would eliminate the advantage to also signing up for DirecTV, which has been struggling to keep subscribers since AT&T bought it for $49.5 billion last year.

Analyst Jan Dawson, chief analyst at Jackdaw Research, says he is not convinced AT&T will go all-in on unlimited. “I think they’re happy to keep their all you can eat plans limited to DirecTV customers, at least for now,” he notes.

A few months ago, no one thought Verizon would go all-in on unlimited either.