Can T-Mobile's Free High-Speed Data Be Successful?

Source: T-Mobile.

T-Mobile US (NYSE: TMUS  ) CEO John Legere has never been one to mince words. The colorful executive shot another verbal broadside at Sprint, paired with an aggressive incentive program. Other carriers, and especially Sprint, have been giving their best deals to outsiders forever, while leaving loyal customers empty-handed. So existing T-Mobile subscribers who bring a poor, suffering Sprint (or Verizon or AT&T) subscriber over to Magenta, well, they are due for a nice reward.

T-Mobile users who refer a new customer to the service will receive a full year of free 4G data service. Not only that, but the new customer will also enjoy the same incentive. If you've already qualified for this reward once, you're not getting another year. But you do get a $10 credit to your monthly bill for another year.

This sounds like a great recruitment program... but will it work?

What is this program really about?
First, let's get the most obvious point out of the way: This is really not about rewarding existing customers, and all about roping in more subscribers.

The big hope is to convert T-Mobile's 50 million wireless customers into a low-cost recruitment force. Word-of-mouth marketing is a powerful force -- assuming that the product or service that's being sold actually inspires a positive attitude. Throwing up to $30 of monthly perks into the mix could certainly get some good feelings going, and T-Mobile will also reimburse the new customers for up to $650 of Sprint, AT&T, or Verizon cancellation fees.

With a total of two years of free data service and a hefty cancellation reimbursement allowance, T-Mobile's costs seem to rack up very quickly. Don't forget that the whole package needs to be marketed, as well -- neither billboards nor direct mailings are free.

However, the organic nature of this program makes it a terrifically targeted campaign. The cost per gross addition will almost certainly be higher than the $320 per new subscriber that T-Mobile reported in 2013.

But there will be less wasted effort and fruitless advertising involved compared to the regular "megaphone in the shopping mall" approach. Plus, T-Mobile must be banking on the true value driver behind incentive programs and gift cards. Many of these incentives will simply never be claimed.

For example, forty percent of Americans who receive a gift card just never use it for anything

T-Mobile has set up a fairly sweet little promotion here. If nothing else, the company may get some people to try its service just for the free swag and lack of long-term commitment. There are no guarantees that these curious customers will stick around, but it's a foot in the door. Every journey of a thousand miles begins with the hardest step.

Free cash doesn't always help, believe it or not
Unfortunately, incentive programs don't always work. In fact, they often fail outright. For example, when Microsoft (NASDAQ: MSFT  ) rebranded its Live Search service as Bing in 2009, the new service was paired with cash incentives for actually using its online shopping tools. But that program never gained traction, and was cancelled in 2010.

Bing Cashback was quickly revamped, renamed, and relaunched as Bing Rewards. This time, you were able to get paid for buying nothing and simply doing your regular online searches on Bing. This version is still around four years later; but has it made a difference to Bing's market share?

According to search market researcher ComScore, Microsoft's search tools have indeed gained some ground since the summer of 2010, rising from 11% to 19% of the U.S. search market. 

But these gains have not stolen any search action from market leader Google (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) . Big G also rose during this period, reaching a company-record 67.5% share this spring.

Microsoft has largely been siphoning search users away from search partner Yahoo!, which actually powers most of its web searches with Bing anyway. 

The Foolish takeaway
Even when incentive-based marketing programs do work, they're rarely huge slam-dunk wins. Coca-Cola (NYSE: KO  ) claims to have the largest online consumer promotion program in its long-running: My Coke Rewards.

But My Coke Rewards has just 17 million registered users for a company that ships more than 20 billion cases of soda every year. That's a vanishingly small promotional reach, despite the dead-simple process of collection points for everyday purchases.

In other words, I don't expect T-Mobile's subscriber counts to spike sky-high based on this marketing program. It remains a clever and reasonably effective recruitment booster, but it's not a game changer like deep-discount handset prices, or proven top-notch network quality can be.

John Legere's colorful barbs for "arrogant" and "indifferent" sector rivals are always fun to read, but this particular promotion doesn't seem likely to move T-Mobile's needle. And I say that as a longtime T-Mobile customer myself.

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