Subscriber Growth Shows T-Mobile CEO John Legere's Strategy Is Working

T-Mobile gained 2.4 million new subscribers in the first quarter which shows that the radical changes its CEO have made to how is sell mobile phone service are working.

May 7, 2014 at 10:32AM

While another famous T made his mark by having pity for fools, T-Mobile (NASDAQ:TMUS) CEO John Legere has shown nothing but contempt for what he sees as the foolish actions of his industry rivals. 

Being aggressive, mocking his competition, and making real changes to how T-Mobile does business has paid off in a massive influx of new customers for Legere. That brash attitude brought the wireless carrier 2.4 million new subscribers -- more than the rest of the industry combined for the period -- and also has rumors circulating that the company that owns Sprint (NYSE:S) wants to merge the two mobile phone companies with Legere as the boss.

"A year ago I promised that we would bring change to what I called this arrogant U.S. wireless industry. We are delivering on that promise and our results reflect the growing customer revolution that we've ignited," said Legere in a release.

These results show that T-Mobile's "Un-Carrier" strategy, which includes ending the requirement for long-term contracts and allowing people to upgrade their devices more often, is working. T-Mobile also began aggressively courting customers from Sprint, Verizon (NYSE:VZ) and AT&T (NYSE:T) by offering to pay the early termination fees of people who want to switch. 

Legere's strategy is working 

If the goal is to grow subscribers and figure out how to make money down the line, then Legere's plan is working flawlessly. T-Mobile now serves just over 49 million customers, an increase of 44% from the 34 million it served at the end of the first quarter last year. The company still sits in fourth place among wireless carriers, but it has narrowed the gap with Sprint to around 6 million customers. Sprint lost 476,000 subscribers in the first quarter, which prompted Legere to gloat on Twitter: "Sounds like a lot of people took my advice to #SprintLikeHell," which I wrote about in Is T-Mobile Growing at Sprint's Expense? 

Those new subscribers brought T-Mobile more revenue -- the company took in $6.9 billion during the quarter, an increase of nearly 50% over the same quarter in the previous year. That increased revenue has not brought profitability, as the company lost $154 million for the quarter compared to a $106 million profit a year ago. 

Those losses may just be a speed bump on the road to becoming a legitimate rival to AT&T and Verizon if the loss comes from increased customer acquisition costs ... as long as the company can hold onto its new users. That seems likely as T-Mobile also reported what the company called "a record low churn rate of 1.5%" on its postpaid (people who get a bill) customers.

The Sprint deal is looming

Softbank CEO Masayoshi Son, whose company owns Sprint where he serves as chairman, has not been shy about his desire to buy the number four carrier, appearing last week on The Charlie Rose Show and CNBC claiming a post-merger Sprint will be good for the wireless industry. There are two major hurdles facing any such deal: paying for it and gaining regulatory approval.

On the former, Sprint CFO Joe Euteneuer and Treasurer Greg Block met with six banks "to ensure the lenders would be ready with financing structures when Sprint decides to pursue a takeover," said three sources who were not named because the discussions are private, according to Bloomberg

The discussions with the banks are complicated as buying T-Mobile also means taking on its $8.7 billion in debt, so adding even more debt to the potentially combined company is a concern.

Getting Federal Communications Commission and Justice Department approval for a deal could also be an issue as regulators blocked AT&T's effort to acquire T-Mobile in 2011. Son however, according to Bloomberg, believes AT&T was not prepared for those hearings and that a case can be made for why this merger is in the best interest of consumers.

Legere -- who would be the front-runner to run the combined company -- told Yahoo Finance's David Pogue that such a merger could theoretically work: "as a telecom professional who's been at this game a long time, could I wake up tomorrow and use the access and capabilities of those two companies -- and the economic prowess of the two owners -- to create something really different and sustainable in the U.S. wireless industry? I sure as hell could." 

Consolidation is inevitable

Verizon and AT&T both have over 100 million wireless subscribers so a combined Sprint and T-Mobile make the big two a big three. But it's hard to argue that the merger hurts consumer choice. It's also likely that the combination of the number three and number four carriers would result in a bigger company with lower costs per customer. That would allow its CEO to fund ideas that shake up the industry, which might not be possible for much longer if T-Mobile stays on its own given its losses and large debt.

Legere has proven that changing the standard industry approach can change customer behavior, and that alone might be enough to make him the right choice to lead a combined Sprint/T-Mobile.

There are huge challenges to merging the two companies -- they use different technology, for one -- but it's not impossible. And a marriage of Son -- who has a maverick streak himself -- as chairman and Legere as CEO of a much larger Sprint could work. With a larger customer base, any future changes -- such as lowering prices or changing how overages are computed -- would be impossible for AT&T and Verizon to ignore. That can only be good for consumers, and Leger has shown he's willing to do things differently and break from the industry code.

This potential merger may be in the very early stages and it could get derailed in a lot of ways, but if it happens it's likely to be good for consumers and bad for AT&T and Verizon.

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Daniel Kline has no position in any stocks mentioned. He is a Sprint customer thinking of jumping to T-Mobile. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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