Last week, T-Mobile (NASDAQ:TMUS) CEO John Legere sent out a tweet drawing attention to his company's latest promotion -- a free year of Netflix (NASDAQ:NFLX) with the purchase of a Samsung (NASDAQOTH:SSNLF) Galaxy S6 or Galaxy S6 Edge. The company ran the same promotion in January for other Samsung devices. It's a ploy that seems extremely beneficial to T-Mobile for three main reasons.
1. Attract customers from other providers through differentiation
The early reports on the Galaxy S6 indicate that it's going to be much more popular than Samsung's previous flagship model. A report from Korean internet portal Naver reveals that Galaxy S6 and Galaxy S6 Edge pre-orders have already doubled the amount of Galaxy S5 pre-orders in the United States.
With its Netflix deal, T-Mobile is able to differentiate its offer from its competitors. With the popularity of Netflix in the U.S. -- more than 39 million households subscribe to the service -- T-Mobile's offer amounts to a roughly $100 discount for many customers. For consumers looking to buy the Galaxy S6, it makes quite a compelling reason to switch to T-Mobile.
For T-Mobile, it gets to offer that discount at less than full price. It's unlikely T-Mobile is paying the full retail cost for its customers' Netflix subscriptions. While the details of the deal are undisclosed, T-Mobile ought to get a discount for handling the marketing and buying in bulk.
Netflix, meanwhile, receives the benefit of potentially signing up new customers, or preventing customers from churning for at least another year. It can then convert some customers to full-price customers after the 12 months.
2. Attract more existing customers to Samsung's products
If a customer is trying to decide between the Samsung Galaxy S6 and the iPhone 6 and one phone comes with a free year of Netflix, it's more likely he'll choose the phone with Netflix. That's T-Mobile's aim, since Samsung pays out some of the highest incentives for carriers to sell its phones.
Samsung's budget for sales promotions is astronomical. In 2013, it paid out nearly $8 billion in sales promotions, including incentives to salespeople to sway customers toward a Samsung phone over the competitor's. That means T-Mobile will be able to recoup some of the cost of its Netflix promotion through the additional incentive dollars coming in from Samsung. In the end, Samsung may essentially be paying for that Netflix subscription instead of T-Mobile.
If the promotion sways more customers to buy a Samsung device, T-Mobile could benefit from selling additional Samsung devices to those same customers or those households. However, Samsung's customer loyalty isn't nearly as strong as Apple's.
3. Attract customers to higher data plans
The third reason T-Mobile is offering a free year of Netflix is because it directly impacts the amount of data subscribers consume. That makes the offer far more valuable to T-Mobile than simply offering an out-of-pocket discount on the phones.
Ultimately, carriers want to get customers used to consuming as much data as possible and lock them into higher-priced plans. While there's not a huge price gap between T-Mobile's lowest-tier data plan and its unlimited plan, it still wants to move subscribers up the ladder. It currently offers incentives for consumers to subscribe to higher data rates for a low price, but the data limits go back down after a certain date. The hope is to get subscribers accustomed to using more data, and move them up to higher-priced plans.
With the Netflix subscription, the aim is similar. Streaming video accounts for huge amounts of data on wireless networks, and Netflix is one of the primary sources. The move could incentivize more users to upgrade their plans, putting more money in T-Mobile's pocket.
A smart promotion
Unlike some of T-Mobile's previous promotions -- which might be extremely attractive for customers, but not a clear positive for the business -- this Netflix promotion looks like it will have a positive impact on T-Mobile. It doesn't rely on a mass of carrier-switchers or upgraders, so even if it's just mildly successful in attracting new and existing customers to a Samsung device, it should benefit T-Mobile's business.