Should Investors Care About the FTC's Claim Against T-Mobile US?

T-Mobile US stands accused of hiding unauthorized charges, but will the FTC claim hurt the company's long-term business?

Jul 7, 2014 at 6:00PM

T Mobile Test Drive

Source: T-Mobile US 

The Federal Trade Commission has filed a claim against T-Mobile US (NASDAQ:TMUS) regarding hidden charges. T-Mobile plays the marketing role of the rebellious, hip mobile company disrupting stodgy competitors such as AT&T (NYSE:T) and Sprint Corporation (NYSE:S), and accordingly called the FTC move a "sensationalized legal action."   

What do investors (and consumers) need to know about the battle between the FTC and T-Mobile?   

FTC claims T-Mobile profited off premium SMS, T-Mobile offered refunds
The FTC accuses T-Mobile of earning up to a 40% cut from premium SMS services-to the tune of "hundreds of millions of dollars"- that were often charged to consumers without consent. T-Mobile admitted to unauthorized bill charges, but blamed the third-party app developers behind SMS services such as horoscope reports and fixed the problem with a refund program. 

T-Mobile's response to the FTC was less "we didn't!" and more "we stopped!" From the blog response of T-Mobile US CEO John Legere:

In fact T-Mobile stopped billing for these Premium SMS services last year and launched a proactive program to provide full refunds for any customer that feels that they were charged for something they did not want.  T-Mobile is fighting harder than any of the carriers to change the way the wireless industry operates and we are disappointed that the FTC has chosen to file this action against the most pro-consumer company in the industry rather than the real bad actors.

T-Mobile, AT&T and Sprint all promised last year to stop with the unauthorized SMS charges. On the FAQ page for the associated refund program, T-Mobile claims that the company will reach out to those who haven't already requested a refund this summer.

The FTC isn't convinced by T-Mobile's blame-shifting or the integrity of the refund program, though. 

FTC claims T-Mobile knew the charges weren't authorized
The FTC isn't buying that T-Mobile was an unwitting victim at the hands of those app creators. T-Mobile should've known something was amiss based on the number of refund requests alone, which amounted to up to 40% of total premium SMS charges per month, according to the FTC.

Billing methods at T-Mobile also came under fire with the FTC criticizing both the online and mailed methods as purposefully obscuring charges for premium services. Printed bills could come in at over 50 pages, while the online charge breakdown was structured in a way that could hide the reason behind the additional charges.

Will the FTC's claim impact T-Mobile's long-term or its image as the people's carrier? 

The worst-case long-term scenario from the FTC claim is that T-Mobile will have to issue all of the refunds it already promised and improve its billing methods.

Despite T-Mobile's posturing, there's probably not a large percentage of mobile users who think any carrier values the consumer's best interest above revenue. T-Mobile's "for the people" schtick mostly works because of the programs the company offers, which include one of the better smartphone installment payment plans and a new one-week iPhone rental offer. Those programs will keep consumers coming aboard even with the additional charge controversy. 

Competitor comparison
On the metrics front, T-Mobile falls somewhere between industry stalwart AT&T and struggling Sprint. 

T-Mobile has a market cap of 26.8 billion, forward P/E of 29.4, and doesn't offer a dividend. AT&T has an 185 billion market cap, 11.9 forward P/E and a 5.13% dividend yield. Sprint has a 33.4 billion market cap, 82.1 forward P/E and no dividend. Sprint had nearly 55 million subscribers at the end of the first quarter. 

Here's a five-year comparison of revenue and total return price. 

TMUS Total Return Price Chart

TMUS Total Return Price data by YCharts

T-Mobile has altered the mobile landscape and essentially forced AT&T and Sprint to follow the leader with offers like the smartphone payment plan. The forward P/E and revenue comparisons suggest that the market has already baked quite a bit of optimism into T-Mobile's share price. That price didn't move much with the FTC announcement, suggesting that it's not a huge priority for investors. 

Foolish final thoughts
The FTC essentially wants to make sure T-Mobile follows through on its refund program, but also wants to send the message that mobile providers need more transparent billing. The lack of market reaction means that the claim isn't a huge priority for investors, but the fact that T-Mobile's share prices have bumped into the more robust AT&T means new investors should consider waiting for a price drop.

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Brandy Betz has no position in any stocks mentioned. 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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