T-Mobile (NASDAQ:TMUS) has claimed much of the growth in the wireless industry over the past several years. Calling itself the "Un-carrier", the company has often shamed fellow industry leaders -- AT&T (NYSE:T), Verizon (NYSE:VZ), and Sprint (NYSE:S) -- into following in its footsteps.
On this episode of Industry Focus: Consumer Goods, Vincent Shen is joined by Fool.com contributor Daniel Kline as they cover some of the latest updates from the wireless industry, including the potential of a tie-up between the No. 3 and 4 players.
A full transcript follows the video.
This podcast was recorded on Feb. 24, 2017.
Vincent Shen: Looking more from the investor perspective now, with the results of the report you mentioned, it sounds like most of them are pretty close, in some cases, neck and neck. But if you look at the financial results, it seems like T-Mobile is really continuing to lead the pack with its very aggressive marketing and service offerings. It's definitely seeing the bulk of the growth in this industry. The company reported its fourth-quarter results a few weeks ago, actually on Valentine's Day. Revenue was up 23%, net income was up 31% and made 8.2 million net customer additions in 2016, bringing its total tally to 71.5 million. That's pretty impressive.
Daniel Kline: They're growing like gangbusters. The reason T-Mobile is the strongest of these companies going forward, in my opinion, is they don't have to backtrack. They have been the aggressor in terms of cutting price, offering unlimited, building their infrastructure around their pricing structure, whereas Verizon and AT&T had decades of overages, first for minutes, remember when you needed to buy minutes for your phone plan? Or, you paid by text message? So if a friend sent you 20 text messages at night, you were like, "Ugh, crud, that's $11," or whatever it came to. We saw those go away. Now we're seeing data overages mostly go away. That was billions of dollars baked into the AT&T and Verizon business models that T-Mobile has already priced out. They have already gone through those headaches of, how are we still going to make the money? They've been refining operations and making their margin based on adding people and having more customers paying less, rather than squeezing your best customers. And that's going to be a strategy that works. We have talked about this. It's going to force pricing down. We're already saying Verizon and AT&T have both, in one case, gone unlimited with Verizon, and in AT&T's case, opened up unlimited to every customer, as opposed to bundled with DirecTV customers. That's good news for consumers. And that good news is going to keep happening.
Shen: Yeah. So to be clear, on the T-Mobile side, I think it's fair to say that company subscriber growth has pretty much dwarfed the other big three players.
Kline: John Legere would say they have 106% of the growth, I believe that's what he said when I saw him at CES. [laughs]
Shen: You always have to keep in mind, especially if you're looking at the U.S. market, it's a very saturated and well-connected market, so if you're picking up that kind of growth, you're probably taking it from the other players. The stock has actually, since reporting its earnings, only fluctuated mildly. This is probably what I think most people consider a pretty strong showing --
Kline: Well, they pre-reported.
Shen: Yeah. Here, some analysts point to conservative guidance for 2017. But conservative guidance tends to be the case for this company. They tend to come out each quarter and say, "We're doing phenomenally well," and upping that as they go.
Kline: And I think there is a bit of a wild card that as Verizon has reacted, I don't think they're going to hold on to their customers long-term, but by offering unlimited, by doing some better deals, the people who, maybe, were about to leave, maybe it's another two quarters, maybe it takes another couple T-Mobile Uncarrier perks or whatever it is for them to switch. So maybe you would have seen three million net adds in the first quarter if Verizon hadn't gone unlimited, and maybe it'll only be 1 to 1.5 million, or whatever the number is. But it's been more than one million for three straight years, or a little more than that.
Shen: I think, big takeaway on the consumer-facing side, at least, something that I had heard you mentioned when we were talking before the show a few times, and I can see this coming through, you mentioned the words "price war". In this industry, not all that uncommon.
Kline: Let's just look at the last few weeks. Verizon comes out and offers unlimited. And one of the less-reported parts of their unlimited deal was 10GB per phone of free mobile hotspot, 4G mobile hotspot. Sprint followed up immediately with a lower price and included the same thing, with the 10GB 4G mobile hotspot. T-Mobile had to backtrack over its price, which had been a 3G hotspot, I think a 2G in some cases, and match the deal. So, every time one of these companies makes a move -- and it's usually T-Mobile doing it first --
Shen: It's blazing the trail.
Kline: It might take six months for AT&T and Verizon, but if Sprint does something, T-Mobile follows. If T-Mobile does something ... you just saw T-Mobile come out with this plan where your taxes and fees are included in the advertised price. So if they say it's $70 for the first line and $30 for the second line, and $100 for two unlimited everything, your actual bill not counting your phone payment plan, if you have one, is $100. It's not $100.35, it's $100. That lowered the price for existing customers. That doesn't happen.
So then, Sprint followed that by just lowering their overall prices. And you're just going to see this over and over again until, at some point, it becomes, essentially, a commodity, and they'll have to differentiate with service, or who can get a phone branded with Chewbacca on the back, or whatever it happens to be. I don't know where Chewbacca came from. Here's the thing, I had Chewbacca give my GPS directions, it didn't work that well.
Shen: [laughs] And, the last thing I wanted to touch on, really quickly because at this point, it's still kind of speculative -- some stories coming out now that Sprint is curating itself to win a deal over with T-Mobile. What do you think?
Kline: Sprint and T-Mobile talked before. And it was always one of those Sprint broker deals where Sprint would be, one of their people would be chairman, and John Legere would be CEO. Now, it's become pretty clear that Sprint's parent company has said, "We will take a backseat, we will let John Legere, who is a dynamic CEO, be in charge of this." And that paves the way for this from a "would T-Mobile do it" point of view. But the problem with it is, federal regulators have been very negative on the idea of the U.S. market going from four to three. Now, that could absolutely change. There's a new FCC, and they're looking at it differently. There's a new presidential administration, they're looking at things. Who knows? That is as apolitical as I can get.
But the reality is, you have Comcast and other players who could enter this market. And if there's a legitimate alternative fourth player in the space, or fifth player, then this deal becomes a lot more logical. And Sprint needs it. There's a huge amount of ongoing capital investment in this business. And T-Mobile and Sprint could dramatically cut their costs if they were one company, even though there's all sorts of technology hurdles to that.