If you haven't been paying attention to the wireless industry lately, T-Mobile (NASDAQ:TMUS) has shifted from bit player to its leading role as disruptor in chief. After boldly scrapping device subsidies in 2013, the company quickly worked on eliminating the most onerous clauses of a common wireless contract: early termination fees, two-year time frames, and domestic overages.
Last year, T-Mobile CEO John Legere famously predicted his company would overtake rival Sprint (NYSE:S) as the third-largest U.S. wireless provider, although it trailed by more than 8 million subscribers. While it appears T-Mobile fell slightly short of that goal, growing the subscriber base by nearly by 20% on a year-over-year basis was impressive.
The secret to T-Mobile's success is a relentless focus on the consumer. In an earlier article I outlined how T-Mobile is forcing all wireless providers to provide better deals to their subscribers -- essentially transferring benefits away from shareholders back to wireless consumers. Both AT&T (NYSE:T) and Verizon (NYSE:VZ) have credited promotional deals for margin compression (read: lower earnings per dollar of revenue) as they deal with T-Mobile's aggressive deals. After the industry's comfortable oligopoly for years, T-Mobile is upsetting the natural order of things. T-Mobile investors, though, need to ask whether this is sustainable.
A large investor doesn't think so
Personally, I do not feel T-Mobile's business model is sustainable as is. And I'm not alone. Recently, T-Mobile parent company Deutsche Telekom's CEO, Tim Hoettges, broached the subject in an interview with Re/code. After losing money in five of the last six quarters, the lone standout being its second fiscal quarter of 2014 that featured a noncash gain of $731 million from spectrum transactions, T-Mobile's long-term viability is in doubt, according to Hoettges.
Hoettges noted the need for T-Mobile to invest between $4 billion to $5 billion annually amid those consistent losses. Specifically, he said, "You have to earn your money back at one point in time." But due to the high and persistent "barriers of continuation," (a wrinkle on barriers to entry) T-Mobile's Un-carrier strategy appears fiscally unsustainable in the long run.
Unsustainable businesses tend to experience increased prices, underinvestment, or lower quality of services. If T-Mobile raises prices, withdraws some of its Un-carrier initiatives, or stops investing in building out its network, it essentially loses its value proposition and becomes just another wireless company.
Time to act like an oligopolist?
In effect, to enrich shareholders T-Mobile must think less like the disruptive force and instead join Verizon, AT&T, and Sprint in an entrenched oligopoly. But the company has grown by appealing to customers who are no longer satisfied with the wireless market and have adjusted to T-Mobile's low costs and customer-friendly policies. Considering the company has no annual service contracts, there is little to keep customers from quickly leaving if they see better deals elsewhere. This puts T-Mobile in a tough position.
Hoettges mentioned the failed Sprint-T-Mobile merger as a potential exit : "I was intrigued by the idea of having a combination with Sprint and being the 'super maverick' in the market. ... I hope the political environment will change at one point in time." Although such a merger could allow T-Mobile the scale it needs to continue its Un-carrier initiatives profitably, I don't like investing in binary outcomes that have already been rejected. Nor do I see T-Mobile changing its fundamental performance without making changes that would upset its subscribers.