A Case for Shorting Telecom

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Desperation is not attractive. So when I say that Deutsche Telekom's (NYSE: DT  ) T-Mobile is playing a desperate, dangerous game by offering customers unlimited services without a corresponding contract, you know that things are looking ugly.

Reuters yesterday reported that the U.S. cousin of this German-born carrier is about to begin offering its customers unlimited talk, text, and Web surfing for $79.99 a month, no strings attached.

What's that? Yes, the expletives you're hearing in the background are executives at AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , Sprint Nextel (NYSE: S  ) , and even MetroPCS (NYSE: PCS  ) cursing T-Mobile's existence.

But, really, it's T-Mobile that has cursed itself. Offering unlimited service without a contract is the nuclear option, the we-don't-have-an-iPhone-just-this-silly-MyTouch strategy for winning back subscribers, and everyone in the industry is going to pay.

Why? Telco is a commodity business. And like all commodity businesses -- think retail and airlines -- when one provider changes the game, the others follow. Expect every carrier to eventually follow suit here, as well.

T-Mobile and its fans will argue that it had no choice, and that those who choose not to live with a contract will pay more for their phones. Balderdash.

Once you decouple the phone from the contract, you allow electronics retailers to compete on handset prices, and that hands control to customers. They'll shop Best Buy (NYSE: BBY  ) , RadioShack (NYSE: RSH  ) , and elsewhere for the best deals, and then pick the carrier that best suits their price point and location.

Exclusive handset deals and contracts were the two remaining competitive advantages carriers had. One is under attack by Congress, T-Mobile just shed the other. No one wants to see what's underneath, least of all the carriers.

But that's my take. What do you think? Is T-Mobile desperate, brilliant, or simply a realist? Please take a moment to vote in the poll below, and then leave a comment explaining your rationale.

Best Buy and Sprint Nextel are Inside Value picks. Best Buy is also a Stock Advisor selection. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool owns shares of Best Buy and is also on Twitter as @TheMotleyFool. The Fool's disclosure policy never has trouble pronouncing nuclear correctly.

Read/Post Comments (4) | Recommend This Article (3)

Comments from our Foolish Readers

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  • Report this Comment On October 27, 2009, at 3:53 PM, Aryabod wrote:

    The problem with T-Mobile is that they barely have any 3G coverage of their own. When roaming their 3G coverage switches over to ATT's, which is way behind Sprint and VZ. To make matters worse Sprint already has a 4G platform and VZ will most probably have their 4G platform within a year. What most people don't realize is that T-Mobile is a second tier telco, such as Metro PCS, Leap, etc. Were it not for their parent company, Deutch Telecom, they would most probably have folded or merged with ATT.

  • Report this Comment On October 27, 2009, at 4:59 PM, Aryabod wrote:

    Smartphones are becoming more and more of a commodity. When you look at the current offerings from Apple, Palm, Motorola, Samsung, HTC, etc. What you notice is a leveling of the field in technology. What will make the difference is the technology and coverage of the carriers. This is where Sprint and Verizon will have the advantage in 2010. If the Blackberry Tour is an example of how simple it is to make a dual mode (CDMA/GSM) smartphone then expect many more vendors to do the same. This would take away any advantage GSM Telcos have when going abroad to Europe. Dual mode phones are simple to make however evolving into a 4G platform is very costly. The future for Sprint and VZ looks pretty bright.

  • Report this Comment On October 27, 2009, at 6:10 PM, FunFool55 wrote:

    T-Mo is really just following in others' footsteps here. I have been using a no-contract (prepaid) unlimited talk, text & data plan, called Straight Talk, for a few months now. Actually, T-Mo's offers seem overpriced when compared to the $45 I pay per month for unlimited service.

    So to answer your question - they are being realists, and probably a bit desperate... ;-)

  • Report this Comment On October 27, 2009, at 6:17 PM, iTarn wrote:

    Keep in mind that chipset for LTE modem won't be available until the end of next year and chipset for LTE phone won't be ready until 2011.

    Due to lack of LTE end user devices and AT&T still building out its small 3G coverage, AT&T is talking 2012 for LTE.

    For the same reason, Verizon's claim of offering LTE next year is so much vaporware.

    Effectively Sprint/Clear WiMAX will be the only 4G in town for the next several years.

    Note that WiMAX is expanding rapidly in Asia.

    The W-CDMA WiMAX 4G iPhone is about to debut in South Korea where the country's largest cellco plans on building out WiMAX nationwide.

    While voice reception is ok, customers are dissatisfied with the bottleneck in 3G data.

    Which brings up the issue of spectrum depth, effectively the size of the pipe.

    In the US, WiMAX has multiple times the spectrum depth of what LTE will offer.

    The future of wireless is not just who will offer the cheapest phone and plan and they're all the same.


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