Will T-Mobile recover from current weak financials?
Telecom Lead America: T-Mobile’s network upgrades, merger with MetroPCS, and introduction of the iPhone will help the operator recover from current weak financials.
T-Mobile’s Q4 2012 results included an accelerated 8.9 percent year-to-year service revenue decline and high postpaid subscriber losses of 515,000 that will continue to negatively impact the company in 2013.
T-Mobile remains significantly behind AT&T and Verizon in the postpaid market, and the elimination of device subsidies will only add to T-Mobile’s struggles as customers are unlikely to accept paying more for a device.
The operator will attract prepaid and cost conscious postpaid subscribers with the help of MetroPCS, which will result in increased margins and will help stabilize revenue decline in 2014.
T-Mobile’s long-term initiatives with network modernization and the integration of MetroPCS in 2013 will help the operator recover; however, short-term growth will be limited due the competition’s time-to-market advantage over T-Mobile in terms of LTE rollouts, and the iPhone offerings, in the postpaid space.
T-Mobile’s new pricing model will attract customers seeking lower-priced, contract-free service plans.
In Q2 2013, T-Mobile will stop offering its classic postpaid subscription plans which include a subsidized handset. Customers will only have the choice to adopt T-Mobile’s contract-free Value plans in which they may use an unlocked handset or purchase a new device either upfront or through monthly payment options.
The strategy is a bold move for T-Mobile as previous unsubsidized pricing strategies produced negative results for foreign operators. T-Mobile is embarking on a risky venture as Telefónica and Vodafone experienced vast subscriber losses after eliminating equipment subsidies in Spain. Vodafone reinstated subsidized handsets after losing 639,000 customers in Q2 2012.
TBR believes T-Mobile will struggle to persuade customers of the advantage of its new pricing models. T-Mobile will see the most success from its bring-your-own-device (BYOD) strategy.
Consumers desiring lower-end handsets and owners of unlocked devices will be more likely to adopt T-Mobile’s new tactic as they will not face higher upfront costs. Customers seeking higher-end smartphones will be more reluctant to subscribe to T-Mobile due to the significantly higher selling prices of its devices, which would cancel out T-Mobile’s price advantage over the competition.
The iPhone will serve primarily as a means to retain subscribers and reduce churn.
In December, T-Mobile secured the rights to sell Apple products, enabling the operator to add the iPhone to its smartphone lineup in 2013. The operator will capitalize on the iPhone to reduce churn stemming from subscribers switching to rival carriers offering the handset.
T-Mobile will rely on its lower-cost service plans and unlimited data packages to entice new iPhone customers, however, the device will act predominantly as a tool to retain existing customers.
TBR believes T-Mobile chose a bad time to begin offering the iPhone, as it also decided to begin cutting device subsidies. Customers will be unlikely to buy a new iPhone from T-Mobile, as they can get a subsidized one from the competitors. Overall, this move sets up Sprint in better position over T-Mobile as the two compete with low price points and unlimited data plans.
Although T-Mobile’s plans are less expensive than Sprint’s, once the full price of a device is added on T-Mobile’s prices will level out to Sprint’s prices. AT&T and Verizon will not be impacted too much by the move as these carriers focus on the higher-end subscribers.
T-Mobile’s late entry in the LTE and iPhone market will hinder subscriber additions. T-Mobile will face difficulty leveraging the iPhone to gain subscribers as customers partial to the handset likely already own the device through a rival carrier and may still be under a subscription contract.
Though T-Mobile will tout the distinct experience of its service plans and unsubsidized devices, many customers will fail to see the value in the operator’s iPhone as it will carry a significantly higher selling price.
Eric Costa, Research Analyst in TBR’s Networking and Mobility Practice