Offer the iPhone ... or Else

It's pink-slip time at T-Mobile USA, the big American arm of German communications megalith Deutsche Telekom (OTC: DTEGY.PK). The company announced that it will shutter seven of its call centers and let go around 1,900 employees. And that's only the beginning; CEO Philipp Humm wrote in a company memo that there were more layoffs to come. Conspicuously absent from the memo is the main reason the company is suffering. No, it isn't that recently scuttled $39 billion merger with AT&T (NYSE: T  ) . Simply put, T-Mobile doesn't offer the iPhone.

Apple products are not in the catalog
The company is otherwise forthright about admitting that its lack of Apple's (Nasdaq: AAPL  ) popular product is a key cause of its problems. "Not carrying the iPhone led to a significant increase in contract deactivations in the fourth quarter of 2011," Humm said in the press release announcing the company's lackluster Q4 2011 results -- although that reasoning could be applied to any quarter over the nearly half-decade the iPhone's been on the market.

T-Mobile USA is the sick man of domestic cell-phone service providers. An Apple a day -- or thousands of them -- would cure that ill. The company's mortal rivals, AT&T and Verizon (NYSE: VZ  ) , both offer the usual range of Apple products. As such, they take on customers by the millions every quarter, thanks to the seemingly unquenchable consumer thirst for those goods.

Meanwhile, T-Mobile loses clients at roughly the same rate. The contrast is stark -- in Q4, Verizon saw more than 1.2 million new wireless contract subscriber additions while AT&T grew its ranks more than 700,000 in the same time period. On the flip side, T-Mobile suffered a queasy loss of more than 700,000 in the quarter.

Not surprisingly, the one Apple-less cell phone company has watched not only customer numbers but also revenue slide. T-Mobile USA's 2011 consolidated top line skidded 3%, to $20.6 billion from the $21.3 billion it posted the previous year. At the same time, its three main rivals all saw happy increases. AT&T's revenue grew 2% ($126.7 billion from $124.3 billion). iPhone-come-lately little guy Sprint Nextel's (NYSE: S  ) top line advanced 3.4% ($33.7 billion; $32.6 billion). Last but far from least, Verizon experienced a year-on-year rise of 4% ($110.9 billion from $106.6 billion).

But that revenue growth comes at a cost -- the iProducts that make consumers so happy are pricey little beasts to carry. Because Apple depends on the premium value of its sleek products to bring in the bucks, it charges carriers a lot of money to resell those wares. Carriers have to pay Apple a steep fee of around $660 for each iPhone they buy, meaning they subsidize their customers' purchases to the tune of more than $400 per phone, at the very least.

That's a big outlay and hence a heavy drag on profitability. No wonder AT&T and Verizon, not to mention Sprint Nextel, all posted net losses in their most recent quarter despite growing revenue -- thanks in no small part to those Apple-hungry consumers.

Android-powered phones are cheaper for providers to subsidize, but no matter how slick their hardware and how big their app catalog, they don't have the aesthetic appeal and cachet of Apple's goods.

Fast pipes and slick toys
T-Mobile is gambling its future on the power of its network. Much of its capex (to the tune of around $4 billion these days) goes toward building out its next-generation 4G LTE network, which, when it comes onstream, will offer blazing speeds and wide pipes for the data services smartphone users crave. This roll-out is currently anticipated to happen in 2013, if all goes well. One major plank of the company's "Challenger" strategy is to compete on the speed and access of this network rather than on the sexiness of its hardware.

AT&T and Verizon are well on their way toward extensive 4G coverage; the hope is that T-Mobile, thanks to its lower subsidies, will be able to offer essentially the same technology at significantly lower prices for subscribers.

But that doesn't seem to be where the market is these days. Customers want their iPhones and iPads and whatever other cool gadgets Apple will concoct over the next few years, and as T-Mobile's customer outflow suggests, they're more than willing to abandon the providers that won't supply these products to them. They're also happy to pay more for an Apple phone or tablet. T-Mobile might be one of the cheapest options in town, but it seems increasingly doubtful it'll keep customers or market share by operating as a neighborhood discount shop.

That will continue to be a boon for the company's three main competitors, which are well positioned to poach the customers draining away from their rival (in Q4, T-Mobile still held on to around 33 million users). The thing is, those lofty Apple prices aren't going to melt away anywhere near as fast as T-Mobile's customer base, and AT&T, Verizon, and Sprint Nextel will continue to pay dearly for offering iGoods. So in the most likely scenario, T-Mobile will continue to lose customers to its three rivals ... but those companies will take tough short-term hits to their bottom lines as they acquire those users.

The cell-phone business is one of the most ruthless out there, with even the biggest companies laboring to squeeze out a few drops of profit. But there are good, highly investible stocks that capitalize on the popularity of smartphones and tablets. Go ahead and read our free report on the subject.

Fool contributor Eric Volkman uses his iPhone a lot but has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple. Motley Fool newsletter services have recommended buying shares of Apple and creating a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 04, 2012, at 9:46 PM, Raymondpoppy wrote:

    The fact remains that Sprint is the only U.S. carrier to offer new and existing customers the iPhone experience with unlimited data plans starting at $79.99 per month. An investment writer recently summed it up best: “Sprint now offers the best value proposition for a new smartphone user. I got my first smartphone on Sprint this fall because a new AT&T or Verizon data plan, without being grandfathered in with an earlier, lower price, is outrageous. My plan includes 450 afternoon mobile-to-landline minutes, unlimited other minutes, and unlimited texting and data for $79.99. Unlimited AT&T or Verizon plans would have approached $150, and to get a comparably-priced package, I'd have to settle on limited data or texting plans, which I'd have to constantly try to not blow through. Why get a smartphone if you can't have fun using it?”

    Sprint also tied for the number one spot among major wireless carriers for customer satisfaction, according to results from the 2011 American Customer Satisfaction Index.

  • Report this Comment On April 09, 2012, at 3:32 AM, TMFVolkman wrote:

    Yes, but Sprint is hurting because of it. Bottom line has been firmly dipped in red lately, and it doesn't seem like that'll improve soon. Unlimited data is a gutsy, counter intuitive move given current market conditions. The question is, is it sustainable? Looking at Sprint's financials, I have some serious doubts.

    Are you a Sprint customer? If so, do you like their service, and how does it compare to other providers? I'm curious because it's the only major provider I haven't used yet.

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