Will T-Mobile Really Take Over the Wireless Industry?

T-Mobile US (NYSE: TMUS  ) has really shaken up the wireless industry in the last year with its "Un-carrier" strategy and aggressive marketing. Now, the company is looking to build its momentum with big promotions to lure postpaid customers away from rivals AT&T (NYSE: T  ) , Verizon (NYSE: VZ  ) , and Sprint (NYSE: S  ) .

Indeed, T-Mobile CEO John Legere recently declared, "We are either going to take over this whole industry, or these bastards [i.e. other telecom firms] are going to change." However, while T-Mobile is flashing the cash today in order to boost its growth, this tactic will not work in the long term. Buying growth is simply too expensive, and T-Mobile's rivals have much better access to capital in the event of a price war.

The T-Mobile threat
By doing away with device subsidies last year, T-Mobile has been able to offer potential customers lower monthly rates and no contracts, along with a variety of other perks. This strategy has helped T-Mobile quickly reverse a trend of subscriber losses. T-Mobile grew its branded postpaid subscriber base and total customer base by about 10% each in 2013.

The potential threat to other carriers got even greater last week, when T-Mobile announced that it would reimburse new customers for up to $350 in early termination fees from AT&T, Verizon, and Sprint. Additionally, under this new promotion, T-Mobile is offering an instant credit of up to $300 for trading in an old smartphone from one of those carriers.

This attacks one of the most important barriers preventing people from switching wireless providers. With the advent of family plans and 2-year contracts, many families are locked into their carriers because different family members' contracts end at different times. So while one person may be free to switch now, another family member may have a year left on-contract. Typically, the result is that the first family member upgrades his or her smartphone, thus locking in the whole family even longer!

A paper tiger
T-Mobile's new promotion raises the specter of a price war among the big four wireless carriers. To be fair, AT&T and Sprint had already rolled out new incentives of their own in the week before T-Mobile announced its plan. However, T-Mobile's promotion is significantly more aggressive, which could provoke even bigger responses from competitors.

However, I do not expect T-Mobile's current promotion to last very long, and I don't think it will do too much damage to wireless carrier margins. In all likelihood, it's just a test to see how people would react if early termination fees were no longer an obstacle to switching.

The key issue is that the incentives T-Mobile is offering are too generous to be sustainable. The company is currently shelling out up to $350 for anybody who switches -- and that assumes that T-Mobile will eventually break even on the smartphone trade-ins. At that level, customer acquisition costs can really add up.

AT&T and Verizon combined account for around 180 million retail connections. At $350/person, winning just 5% of these subscribers would cost over $3 billion! By contrast, T-Mobile's most recent guidance calls for adjusted EBITDA (a measure of earnings power) of $5.2 billion-$5.4 billion for all of 2013. Add in T-Mobile's better-than-$4 billion in annual CapEx, and you have a recipe for bleeding cash.

Moreover, AT&T and Verizon -- and even Sprint, due to its partial merger with SoftBank -- have much more financial heft than T-Mobile. All three competitors have the wherewithal to offer their own counter-incentives (either to retain customers or to win subscribers back from T-Mobile) and thereby make it prohibitively costly for T-Mobile to buy subscriber growth.

Foolish bottom line
T-Mobile has really shaken up the U.S. mobile industry in the last year, and it looks set to continue on its disruptive path in 2014. T-Mobile's recent incentives for subscribers switching from AT&T, Verizon, and Sprint are great for consumers, but they may not last long.

The problem is that if the new incentive scheme really became popular enough to pose a significant threat to the industry leaders, it would be prohibitively costly for T-Mobile. T-Mobile can't afford to shell out billions of dollars in subscriber acquisition costs when it also needs to invest heavily in its network to keep up with competitors. As a result, today's apparent price war in the wireless industry is more likely to fizzle than explode.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 13, 2014, at 10:45 AM, cellchef wrote:

    This may work in the short term but t-mobile will have to beef up their coverage map. Right now it is lagging even behind Sprint which is the worst out of the big 3 VZW, ATT, Sprint. Only 1 of the big 3 uses GSM so that is the only towers that T-Mobile is able to piggyback off of. They need to invest their money by growing their footprint not the number of customers in exsiting markets.

  • Report this Comment On January 13, 2014, at 1:04 PM, stevor86 wrote:

    we'd love to get out of our T-mobile contract that ends in 8 months. They don't have very good coverage in some places where other companies have better coverage

  • Report this Comment On January 13, 2014, at 1:51 PM, nightwin wrote:

    I think T-Mobile should take their own device and let it's customers out of their contract. Where I live at, we can't get any reception unless I physically go outside and point it to the west. Also, their prices seems to be going higher and higher and not able to go to the lower price pay as you go until my two year contract is up. Everyone else is signing up at $30 a month cheaper than what I pay for being a customer for more than a year. Way to treat your long time customers.

  • Report this Comment On January 13, 2014, at 2:32 PM, ecbatana wrote:

    T-Mobile did start a price war, but their lack of coverage and wherewithal will expose them severely in the coming quarters. Just buying customers alone without any technological advantages, such as Spectrum and lack of coverage will do them little good.

    At least Sprint's "Network Vision" incorporates all of the contiguous spectrum acquired from the acquisition of Clearwire (130 Mhz). Owing to this Sprint will not only manifest that they have the fastest network but they will be buttressed with plenty of capacity (180 Mhz, which includes 14Mhz of their 800 and 36 Mhz of their 1900 bands).

    If Data downloads are to grow exponentially in the next 5 years I just wonder how T-Mobile's strategy, with its limited spectrum (50Mhz) and coverage will be able to compete in a price war. In the end price elasticity will be directly proportional to Coverage and Spectrum holdings.

    My prediction is that by the end of this year Sprint will take the title of the fastest Wireless Network with plenty of capacity, at which time most of their Network overhaul will be consummated.

  • Report this Comment On January 13, 2014, at 3:49 PM, Foosin wrote:

    Author did not think through his hypothetical business case very well. He specifically outlines the typical scenario of staggered upgrade times. Then why assume customers have to pay full ETF on all lines? A family of 4 will average out significantly less than that. T-Mobile's real goal is to shake up the industry and do away with contracts for all carriers. Then all compete for customers without ETF handcuffs. AT&T and Verizon have a lock on low band spectrum in the USA since in 1983 A-side and B-side carriers were granted this spectrum that gives them a virtual coverage monopoly in rural and suburban areas. Once that monopoly is broken then other carriers like T-Mobile and Sprint will compete equally on coverage as well.

  • Report this Comment On January 13, 2014, at 10:26 PM, shan123456789 wrote:

    As Author said, his calculation might no go well. I agree T-Mobile will stop this new 350$ benefit soon, once they get sufficient customers from other carriers

    coming to signal or network ATT is also having issues in some places.

    Hope T-Mobile will upgrade their technology as well to support more data in coming days

    With the T-Mobile way, all other carriers will have to re-think about their plans

    ATT and Verizon need to come up soon with unlimited plans with lower price, else they will be loosing their market slowely

  • Report this Comment On January 14, 2014, at 11:57 AM, TMFGemHunter wrote:

    @Foosin: Thanks for the comment. You're right that some people may not have a full $350 early termination fee. But the offer is going to be most appealing to those who have the higher ETFs. Even if the average is $250, the general point still holds. Furthermore, I didn't allocate any money for the phone trade-ins, but my guess is that T-Mobile will not break even on buying back people's phones and then reselling them.

    I agree with the other comments about T-Mobile's network. While I didn't specifically mention it (for simplicity's sake), if T-Mobile significantly boosts its subscriber numbers, it would need to invest a lot more money in spectrum and cell towers.

    Adam

  • Report this Comment On January 14, 2014, at 1:46 PM, 4vandan wrote:

    First of all T-mobile coverage isn't good at all and I have been told by many people that tried to get service with T-mobile is that they check your credit and if it isn't good you have to pay half down on the phone and make monthly payments for 2yrs. Example Galaxy Note 3 (good credit) no money down $29.50 for 24 months, bad credit 300 down and $17.50 for 24 month, do the math. So if you leave Tmobile your going to owe them big time for not paying off the the phone. So why go with T-mobile? Contract with Verizon or AT&T is better, because your not paying for your phone in payments and your service is better and even if you had to cancel for whatever reason it would still be cheaper then being with tmobile. Tmobile needs to focus on better coverage.

  • Report this Comment On January 14, 2014, at 2:07 PM, TTES wrote:

    T-Mobile coverage where I live is horrible.

    I can understand why people think T-Mobile should first work on getting better coverage. But let's say they do that...then what?

    Then T-Mobile becomes another Sprint/AT&T/Verizon, with basically the same offerings as the other carriers.

    I can definitely understand how they want to "shake things up", but (at least coverage-wise) they aren't in that position yet. Get coverage like Verizon's has here where I live and then offer your mind-blowing plans.

  • Report this Comment On January 15, 2014, at 12:07 AM, shamx wrote:

    @ecbatana

    Unfortunately, Sprint really messed up their network overhaul and they are scrambling to fix it. In the DFW area Sprint had LTE out for more than a year and yet it is abysmal, it's slower than T-Mobiles and ATTs HSPA+ (3G), they keep saying they are working on it, but after a year all it is now is just empty promises, their Network Vision is a joke, and w/o fixing any of these major issues they are planning a tri-band LTE network which nearly none off the current lte phones can support (only the the Max ONE is capable). Only their LTE "Spark" is somewhat comparable and yet it is only comparable to ATTs and T-Mobiles 3G network. Also in Arlington TX, Sprint data is non-existent and goes into roaming which is really stupid considering Arlington is a college town now.

    Comparably T-Mobile is aggressively rolling out their LTE, a year ago today they had 0 LTE coverage, now they cover 200 Million people and re working on smaller markets, on January 1st I saw LTE showing up in some rural areas. And what most people are not aware of is that Tmobile ate up Metro PCS, which means they have access to the spectrum. Currently T-Mobile is running on 10x10 LTE (Sprint is only on 5x5), with Metro's LTE they are using they are starting to roll out 20x20 LTE in DFW and will roll out to more markets, it has shown speeds upwards upto 70+mbps betting out every other carrier in terms of speed.

    But yes, at the end coverage is what's important, with their aggressive growth, at this rate they will cover all 300+ Million in somewhat if not LTE within 2 years.

  • Report this Comment On January 15, 2014, at 12:14 AM, shamx wrote:

    @TTES

    Just to put it into perspective, ATT and Verizon both have around 56% profit margin, think about that for a second, 56% is not a small amount it's a ridiculous amount of money at their scale.

    T-Mobile's goal at the end is to aim for a 36% profit, which allows them to aggressively lower prices. This is why ATT is reacting to all this, ATT doesn't want to let go of that 56% which T-Mobile is willing to lower for more customers and to not actually totally rip customers off. Just compare mobile prices with the US and Europe, Europe is much cheaper because the carriers don't make so much margin, and they don't need to tbh, its just the ATT fatcats at the top that don't want a reduced paycheck.

  • Report this Comment On January 15, 2014, at 1:46 AM, CrazyDocAl wrote:

    Verizon has dumped tons of cash into upgrading their towers, T-mobile is trying to buy customers. Which is a better long term investment?

    T-mobile doesn't have LTE support in all 50 states. In most of the states they do have LTE service it's strictly in the large cities. Once you leave the city you can forget about 4g service.

    Sorry but I'll stick with the best network and pay more.

  • Report this Comment On January 15, 2014, at 5:20 AM, Penthouse7 wrote:

    I Just Un-carrier myself with T Mobile, I was on a contract up to 2016 because of recent upgrade on my handsets, I called them and inquire how I can lower my Monthly recurring cost, I was paying $250.00 for a Family package for 4 lines for unlimited Talk, Text and Data on the old plan, with the simple plan it cost me only $150.00 but a migration fee of $500.00,They proposed to upgrade all 4 lines to new handset and they will waive the migration fees but I will pay $100.00 a month for the new handsets, each handsets would cost $625.00 plus tax or $25.00 a month, If I upgrade I will be paying the same amount for 2 years, since my handsets are relatively new (S4) I decided to just negotiate the migration fee, the service rep was very creative he waive 50% of the fee, soI ended up paying only $250.00 spread in 5 months and have the same bill for 5 months after which it will go down to $150.00 a month. GREAT MOVE T MOBILE.(FYI I have been with T Mobile for 8 years, as loyalty I remain with then instead of moving to another carrier.).......

  • Report this Comment On January 15, 2014, at 5:23 AM, Penthouse7 wrote:

    With the recent purchase of frequencies from VZW T Mobile service will improved, great moved ...............

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