What if you could make more money by giving away one of your most popular services?
That's exactly what T-Mobile (NASDAQ:TMUS) is doing. When it launched Binge On late last year, providing unlimited video streaming that doesn't count against customers' data caps, it looked like another loss leader for the Un-carrier. In fact, the company is able to save bandwidth while providing its customers with more video streaming over its LTE network, according to a recent survey from P3 Group (link opens PDF).
This is a result of T-Mobile's controversial decision to limit video quality for Binge On users to 480p video quality -- roughly the same resolution as a DVD. The lower video quality means that video files can be sent using less data. While some companies, like YouTube, have complained about the decision to downgrade videos, other streaming services, like Netflix (NASDAQ:NFLX), have supported the decision. Binge On has become the focus of public interest groups like EFF, and the FCC said it may look into any net neutrality violations of the promotion.
Despite the controversy surrounding T-Mobile's Binge On promotion, it appears to be a win for everyone. The customers naturally benefit from the promotion, since they're getting free data.
YouTube decried the promotion for a couple reasons: it's not included in the list of zero-rated apps, but its video streams are still downgraded to 480p. Nonetheless, the subsidiary of Google -- an Alphabet company -- has seen the time spent watching its videos by T-Mobile subscribers increase in the six weeks following the launch of Binge On.
Netflix and Hulu have seen an increase in usage as well. That's to be expected when users don't have to worry about going over their data limit. But it seems the data they save from video streaming is allowing them to use their data more freely in other apps like YouTube, Facebook, and more. That means all app developers benefit from Binge On, not just the streaming video companies.
Finally, T-Mobile benefits in two ways. First, it's able to decrease the amount of bandwidth used on its network. While T-Mobile isn't starved for network capacity, it is adding customers at a rapid pace -- perhaps faster than it is capable of expanding and densifying its network. By reducing the bandwidth load per subscriber, T-Mobile will be able to handle further growth in its customer base.
More important, Binge On helps bring in new customers. T-Mobile is using Binge On and its other Un-carrier promotions like Music Freedom -- which is exactly like Binge On for music streaming apps -- to continually attract new customers. And they've worked: T-Mobile has added over 1 million net new subscribers in each of the last five quarters.
Can it last?
The FCC is reportedly looking into any net neutrality violations posed by T-Mobile's promotions such as Binge On and Music Freedom. T-Mobile defends against those accusations by pointing out that it's not getting paid by any apps and its network doesn't favor traffic from one source over another. Public interest group EFF has called out T-Mobile for throttling down all HTML 5 video traffic, not just the traffic zero-rated through Binge On. And as mentioned, YouTube is not happy with the downgraded video, even if it is seeing longer view times from T-Mobile customers.
But T-Mobile has its supporters as well. Netflix CFO David Wells told investors on the company's fourth-quarter earnings call that the company hopes programs like Binge On expand. Additionally, the millions of T-Mobile customers taking advantage of the free data seem pretty happy with the service. If they're not, they can voluntarily remove the video-quality limits, which will exempt them from the Binge On promotion.
It's a tough case against T-Mobile, especially considering that it's hard to find someone that's not benefiting from Binge On in some way. It would be a surprise if there was a ruling or lawsuit against T-Mobile that came to fruition, but it's not completely out of the question. In the meantime, T-Mobile is bringing in more and more customers, and saving its network bandwidth. That's a recipe for higher profits.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Netflix. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.