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Where Is T-Mobile's Subscriber Growth Coming From?

By Adam Levy - May 5, 2016 at 9:29AM

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How is T-Mobile adding so many phone subscribers in this competitive environment?


IMAGE SOURCE: T-MOBILE

T-Mobile (TMUS 1.64%) is once again leading the industry in phone subscriber growth. Its 877,000 net gain in postpaid phone customers is a particular highlight, considering Verizon (VZ -0.20%) lost 8,000 postpaid phone customers and AT&T (T 1.43%) lost a whopping 363,000 postpaid phone subscribers. Sprint (S) has yet to report its first-quarter results, but it's likely to follow suit, although CEO Marcelo Claure hinted that it might post a positive number.

While AT&T is clearly bleeding subscribers, T-Mobile is adding way more subscribers than its competitors are losing. So where are all of T-Mobile's subscribers coming from?

A look at the numbers
T-Mobile's churn rate was down 13 basis points sequentially to 1.33%. That's still higher than Verizon's 0.96% and AT&T's 1.1%, but considering T-Mobile has just about half the number of subscribers as the larger two carriers, that 1.33% is a much smaller absolute number. So despite the higher churn rate, T-Mobile is losing fewer subscribers than its competition.

Those subscribers who do churn out of T-Mobile are mostly going to T-Mobile's major competition, but the Un-carrier is adding more subscribers from each carrier than it loses to them. For AT&T, T-Mobile added 1.75 subscribers for each one it lost. It added 1.34 subscribers for each subscriber that went to Verizon. And the number was 1.35 for Sprint. Overall, it added 1.5 subscribers for each one that churned out.

Eighty percent of postpaid phone subscribers switching to T-Mobile came from AT&T or Verizon. Management noted that it uses its prepaid Metro PCS brand to compete with Sprint, so it saw a larger percentage of prepaid customers from Sprint than the two larger carriers.

Will this trend continue?
There are a couple of factors that could help T-Mobile continue growing its postpaid phone subscriber base as competitors lose subscribers.

First, T-Mobile's low-band 700 MHz spectrum deployment is well under way. It's currently deployed in 28 of the top 30 metropolitan areas. This helps improve coverage indoors as well as in rural areas. As T-Mobile's coverage improves, it should see an improvement in its churn rate. Additionally, improved coverage should help attract more customers to its network.

Second, T-Mobile's promotions, such as Binge On and Music Freedom -- which don't count video and music streaming against subscriber's data caps -- have the potential to reduce churn. On the company's first-quarter earnings call, COO Mike Sievert said Un-carrier moves such as Binge On are directly tied to subscriber growth.

The company reported that the amount of video streamed by T-Mobile subscribers doubled since the introduction of Binge On. That kind of behavior change is indicative that a large portion of subscribers are now able to get a lot more value out of T-Mobile compared to other carriers. That makes them much stickier and more likely to recommend T-Mobile to their friends.

What's more, T-Mobile has been able to sustain its average billings per subscriber despite zero-rating the biggest sources of data usage. And the impact on actual data usage has been minimal because of the requirements to stream video in 480p instead of high definition, which is largely lost on phone screens anyway. As such, T-Mobile has been able to not only maintain its margins, but also expand them. EBITDA margin expanded eight percentage points year over year in the latest quarter, although it's slightly inflated because of depreciation on device leases and its data-stash program.

Overall, it looks as if T-Mobile is positioned well to continue taking subscribers away from the competition.

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Stocks Mentioned

AT&T Inc. Stock Quote
AT&T Inc.
T
$20.57 (1.43%) $0.29
Sprint Corporation Stock Quote
Sprint Corporation
S
T-Mobile US, Inc. Stock Quote
T-Mobile US, Inc.
TMUS
$128.62 (1.64%) $2.07
Verizon Communications Inc. Stock Quote
Verizon Communications Inc.
VZ
$48.94 (-0.20%) $0.10

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