Why the Gap Is Widening Between Sprint and T-Mobile

In this segment from Industry Focus: Consumer Goods, Vincent Shen and Fool.com contributor Daniel Kline break down the current state of Sprint (S) and T-Mobile (TMUS 0.56%). While the former struggles to balance profitability with the investments needed to remain competitive in the wireless industry, the latter continues to claim market share thanks to a visionary CEO and its Un-carrier strategy.

A full transcript follows the video.

This video was recorded on Nov. 7, 2017.

Vincent Shen: It's been a while since we've talked about this space, but I understand that T-Mobile and Sprint have been making headlines in the past several months, this whole ordeal. Those companies are the No. 3 and No. 4 names, respectively, among U.S. wireless providers. Before we dive into the recent news around their potential merger and how that's fallen through, I want to talk about some of the background for the two companies, and I think that will help once we get into the nitty gritty of the recent news, in terms of understanding some of their motivations and the various incentives that are at play here.

Let's start with T-Mobile. The company, I think, is probably best known for two things -- its CEO, John Legere, and also its Un-carrier branding, which I think has been very successful for the company.

Dan Kline: And it's not just branding. When John Legere took over, and he's a very bombastic guy, I always likened him to a 1980s pro-wrestling manager. He's very in your face, he'll taunt you, he'll call out his opposition, he has nicknames. Sort of a fun version of what the president likes to do. So what they did with Un-carrier is, he looked at every consumer pain point in the mobile process. So the first big one was contracts. You'd be tied into this two-year contract, you would have a device subsidy, you wouldn't know what you were really paying for anything. They got rid of that.

The more recent ones are having only unlimited data. Yes, I know there's caveats, they slow you down after 22 gigs, but that's 2% of the audience. For most people, completely unlimited data. And every few months, they come out with something new, and it's silly stuff. T-Mobile Tuesday is just like, this Tuesday I get a free Frosty at Wendy's. But last month, they came out with, "We're giving all of our customers Netflix." So they're really trying to find a way to be different, to be a customer first mobile company. And it's worked. T-Mobile has added over a million subscribers for 18 straight quarters. And as John Legere likes to say, they've had all the growth in the wireless space.

Shen: Legere started his role at T-Mobile in late 2012. They rolled out the first Un-carrier Initiative 1.0, they called it at the time, not much later, I believe it was March of 2013. So in that time, as you mentioned, the company has seen some pretty strong results. I think customers and listeners will realize that a lot of the things that they enjoy now, maybe even take for granted when they look through their wireless bill, was often a byproduct of the competition coming from these various Un-carrier moves.

Kline: T-Mobile has forced AT&T and Verizon, and to a lesser extent Sprint, because Sprint wasn't quite as evil as AT&T and Verizon were acting in some of their no-longer practices, but the big one was overages. It's hard to quantify how much we were paying in overages, because they function in two ways. There's the actual, "I go over my data allotment and have to pay." That was billions of dollars. But Legere would always talk about the person who bought a too-big plan, because they didn't want to worry about it, and that was perhaps tens of billions of dollars that was getting sucked out of consumers' pockets. So by being transparent and saying, "We're not going to do those kind of things" -- T-Mobile was No. 4 and sinking, and since 2013, now they're No. 3 and rising. And they've been picking up momentum pretty much every quarter. The challenge is, as Verizon, AT&T, everybody's prices have come down, everybody offers unlimited, Sprint is really cheap, the challenge is, how do you keep doing that when maybe a lot of those pain points are gone?

Shen: Yeah. At the end of 2013, which was, again, the year the Un-carrier program started, T-Mobile had 46 million customers, they had a churn of about 1.7% per month. Now, as of the most recently reported quarter, that's Q3 for 2017, reported just October 23, they have 71 million customers, great growth there. Their churn is down to 1.2%, seeing very consistent progress with that core metric for this industry. Some other notable highlights, from that approximately four-year period, to note, under the leadership of Legere, they moved, as you said, from the No. 4 to the No. 3 U.S. wireless carrier. Of course, that gap --

Kline: It's a huge gap.

Shen: -- is a massive one. So it's really AT&T against Verizon at No. 2 and No. 1, respectively, and then T-Mobile and Sprint at No. 3 and No. 4, respectively. They've had 18 straight quarters of more than one million net customer additions, which I think you mentioned, Dan. They've had compound annual top line growth of almost 14% for that period, improving profitability. T-Mobile shares have gained over 200%, so stockholders are pretty happy with the Un-carrier.

Let's turn our attention now to Sprint. What have been the big themes or drivers for this company in recent memory? Because they're not doing nearly as well.

Kline: Sprint is doing better, but Sprint was a sinking ship. It was losing ground as T-Mobile was gaining ground, because it had no identity. It was just the carrier that's a little cheaper than AT&T and Verizon, but not quite as cheap as T-Mobile. Marcelo Claure, their CEO, who is willing to go toe-to-toe with John Legere, he sort of righted the ship, but the way he's done it is heavy discounting. So Sprint is almost always, at some point, the best deal. And when I say some point, I mean, maybe it's families this week, maybe it's individuals next week. They're not always the lowest across the board for every type of plan you would want. But they generally have some crazy deal that would be good for somebody. They do things like two iPhones for one.

So they've returned to slight growth in terms of subscribers, but it's not necessarily sustainable, because a lot of their promotions sunset. So March 2018, you no longer pay $30 a month, now you pay $55. And it's so easy to move now, which makes the T-Mobile churn number even more impressive. It's no longer the days where moving was a big challenge and it was hard to get your number. Now, it's very easy. You could switch cellphone providers every three months if you wanted to, it wouldn't be that big of a deal.