Narrative: T-Mobile is Winning in US Mobile
Each narrative page (like this) has a page describing and evaluating the narrative, followed by all the posts on the site tagged with that narrative. Scroll down beyond the introduction to see the posts.
T-Mobile is Winning in US Mobile (May 6, 2017)
Created: May 6, 2017
This week seems as good a time as any to finally create this narrative, which I’ve been thinking about for quite a few weeks. Sprint was the last of the US wireless carriers to report its results for Q1 this week, while T-Mobile announced plans for a 5G network using the 600MHz spectrum it acquired in the recent FCC auction. Both of these news items were occasions to consider the role of T-Mobile in the US mobile market, and the truthfulness or otherwise of the prevalent narrative, which is that T-Mobile is coming out on top while the other carriers suffer. Note: this narrative is also the subject of this week’s Narrative Video, which you can see here on YouTube or embedded at the bottom of this essay.
That narrative, as with all the narratives here on the site, is worth evaluating. There’s certainly some evidence that appears to confirm it:
- T-Mobile has led the four major carriers in postpaid phone net adds for the last three and a half years
- It’s led the industry in total postpaid net adds for the past five quarters
- It has the lowest postpaid subscriber losses of any of the big four, despite being bigger than Sprint
- It’s the largest prepaid carrier of the four network operators
- It’s had the biggest improvement in churn and margins of any of the big carriers over the past couple of years
- It’s the only US wireless carrier to consistently grow service revenue and total revenue over the past year
- It’s largely set the agenda for competition in the market, leading on the move away from two-year contracts and towards device financing, and in the return to unlimited plans.
On the face of it, that would appear to be pretty strong evidence in favor of the prevailing narrative. But on the other hand, the following are also true:
- T-Mobile’s postpaid phone churn remains quite a bit higher than both AT&T and Verizon’s postpaid phone churn
- Its average revenue per postpaid phone user is well below those of AT&T and Sprint, the other two carriers which report this metric
- Its operating margins are less than half those of Verizon and AT&T’s wireless businesses
- Outside of phones, T-Mobile typically adds fewer subscribers than any of the other carriers each quarter.
So what should we make of all this? Well, of course, the reality is rarely as straightforward as the narrative suggests. T-Mobile has had enormous success over the past four years as it’s pursued its Un-carrier strategy, leading the industry in growth in the category that has in the past defined the market: postpaid phones. It’s done so by announcing one move after another to undercut the competition on price, while disguising these as busting industry norms. And it’s worked enormously well. John Legere, whose sweary schtick I find tiresome, has nonetheless attracted millions of followers on Twitter and has the ear of the wireless industry media, largely because the rest of the industry is so boring and cautious in PR terms.
Perhaps even more importantly, T-Mobile has meaningfully improved its network performance over the last few years to the point where it’s now very competitive in many parts of the country. It likes to use user-generated speed test data rather than the typical industry network test methods, and those show really great results relative to the official ones, so you can see why. But it’s worth remembering that those results likely aren’t representative – most of us aren’t regularly testing our networks, especially if we’re happy with the performance. But there’s no doubting that, even using the more traditional testing methods, T-Mobile’s network has improved dramatically, and that’s a big part of why it’s churn has come down and its gross adds have gone up.
However, the key here is that almost all of this has been focused on two categories: postpaid phones, and prepaid. And in Q1 2017, the quarter the carriers have just reported, we saw the lowest-ever postpaid phone net adds and the second-lowest prepaid net adds ever. Over the past year, prepaid rolls across the five major operators expanded by just under 600k, while postpaid phones grew by 1.3 million. Go back a few years, and prepaid regularly grew by 10-12 million a year, and postpaid phones by five million. The reality is that the US mobile industry is increasingly saturated with phones – nearly everyone who is ever going to have a phone has one already. And that means any growth for individual carriers in phones will have to come from competitive switching. And that’s going to reduce growth. As such, even though T-Mobile continues to lead in postpaid phone net adds each quarter, the actual number of net adds has been down year on year for most of the past two years.
Those growth rates are going to continue to slow in future, especially now that AT&T and Verizon have reintroduced unlimited plans and thereby neutralized one of the big competitive differentiators. And that means that future growth in the mobile market is far more likely to come from other categories, whether that’s tablets and wearables in the traditional consumer side of the market, or other categories entirely, such as connected cars, smart meters, fleet tracking, and so on. T-Mobile has never been a strong player in that market relative to the other three carriers, and although it’s made some recent strides in that area, there’s been no dramatic growth (and it’s even stopped reporting that category separately from its wholesale business, muddying the water further).
That brings us to this week’s announcement about a national rollout of 5G, which could enable new business models for IoT services. In the briefing I had from T-Mobile, one of the executives referred to using this network and the tiny battery-efficient sensors it will enable to “Lo-Jack everything”, or in other words to tag many objects to track them. The 5G announcement was classic T-Mobile: lots of bombastic claims and denigration of competitors, dismissing their 5G efforts (which are far more aligned with how the rest of the industry is thinking about 5G) as either fake 5G or irrelevant. T-Mobile may end up rolling out its more limited version of 5G more quickly and broadly than the competition, but that’s not to say it will end up winning in that department any more clearly than it already has in the traditional market.
There’s no denying T-Mobile’s success over recent years. It’s added more traditional phone subscribers than any other carrier by some margin, and continues to do so. But it’s very focused on that legacy part of the market, and does far less well in the areas of the market that will provide the vast majority of future growth. Its network, for now, remains inferior, which is reflected in its lower pricing and ARPU. And its smaller scale drives lower margins which, while rising, aren’t going to match those of the bigger carriers anytime soon, which limits its marketing and other budgets. Lastly, it doesn’t have a landline play, and in a world in which we’re going to see increasing bundling between home broadband and TV and mobile services, T-Mobile simply doesn’t have a play. So it’s definitely a stretch to say it’s “winning” in the US mobile market in any kind of broad way. Yes, it captures much of the positive media attention, and yes it’s doing so much better than it was five years ago, but the real picture is far more complex and nuanced, especially when it comes to the future.
T-Mobile Caps Roaming Benefit in Canada and Mexico (Oct 13, 2017)
The way T-Mobile has always explained its Un-Carrier moves to me is that, while some other promotions may be temporary, these are all permanent. But it looks like we’re seeing the first counter-example of that, with a change to the way the company’s roaming plan works in Canada and Mexico for unlimited data customers. Until recently, the company had offered unlimited roaming in those two countries to those customers, but now the company is capping usage at 5GB in those two countries before booting users onto the same free throttled data roaming it offers in many other countries. What’s happening here is that T-Mobile is encountering the same problem as every other unlimited offering from any telecoms operator ever: some small number of users will always go over the reasonable use the company projects, and ruin it for everyone. This is why pretty much all “unlimited” plans come with caps and throttling thresholds in reality, and it’s why it’s generally a bad idea to offer any truly unlimited service without some terms and conditions or caps, whatever the marketing benefits might be.
With all the renewed talk of a Sprint-T-Mobile merger in recent months, one big assumption has been that the Trump administration would view it much more favorably than the Obama administration did, and that it wouldn’t therefore be shot down this time as it was last time. However, Bloomberg reports today that the staff lawyers at the Department of Justice are mostly the same as under the previous administration, even if the leadership and presidency has changed in the interim, and that the lawyers themselves are likely to reach much the same conclusion today as then. In other words, if the deal is to be approved by the DoJ, it will likely happen over the objections and recommendations of the staff rather than with their support. That’s certainly not a deal-killer – SoftBank Chairman Masa Son has cozied up to the Trump administration on issues like job creation, and would presumably curry some favor on that basis. But this does make it more challenging for the deal to go through than many might have assumed. Last time around, the deal was called off before it even formally went through regulatory approval on the basis that it wouldn’t succeed, so I would guess that Son and others would be feeling out the regulatory authorities quietly behind the scenes again this time around to ensure smoother passage.
AT&T has pre-announced some figures for its third quarter results in an SEC filing, including nearly 300,000 DirecTV Now streaming subscriber additions in the quarter, but around 90k traditional pay TV losses. Assuming that latter number is reported on the same basis as in the past and therefore excludes the DirecTV Now customers, it would represent a significant improvement, as the company lost over 300k subs in Q3 2016, and over 200k subs in Q2 this year. But losses are losses, and although the company through hurricanes into the mix as a driver, it’s clear that the underlying drivers that caused previous declines are still big factors too, and those include competition (and have in the past included the challenge AT&T faces of not being able to provide broadband-TV bundles in big chunks of the US).
Two wireless items in the filing are also worth noting. Firstly, the company said it saw 900k fewer postpaid phone upgrades in the quarter, a continuation of a long-standing trend at AT&T of lower upgrades over time, which has seen it fall to by far the lowest upgrade rates among the big four US carriers. Secondly, it’s breaking out certain prepaid IoT connections – notably those associated with connected cars – in its reporting for the first time, and it sounds like it has just over half a million of those as of the end of the quarter. That’s a tiny fraction of its overall connected car connections, which stood at a cumulative 13 million connections as of the end of Q2, the vast majority of which are low-revenue telematics connections sold to car manufacturers rather than directly to end users.
I said in commenting on last week’s Reuters story about Sprint and T-Mobile merging that the one element that didn’t ring true was SoftBank ending up with 40-50% of the combined entity, and Bloomberg is now reporting that majority owner SoftBank is willing to accept something close to its current market price for Sprint, leaving it with closer to 30%, which feels much more in line with what I would have expected. It’s not a great exit for SoftBank, which bought 72% of Sprint for $7.65 a share in July 2013, while shares are trading at $7.83 at the time I’m writing this, having dropped 8% during the day so far, presumably on the back of this news about valuations. However, the stock had traded as low as $2.66 early last year, so SoftBank is at least poised to get about what it paid for Sprint in return for a decent minority share in what could be a much more promising company once the integration goes ahead. Sprint’s valuation, of course, has been bid up significantly over the past year partly off the back of its own improving business but in large part also because a deal with T-Mobile has seemed more likely since last fall’s US presidential election. Its price rose from around six dollars to over nine in the period immediately following that election, so the drop today is likely a reflection of the fact that expectations for a premium are dissipating.
Reuters reports that Sprint and T-Mobile are nearing agreement on key terms of a merger deal, and suggests that due diligence and other steps would need to come before announcement of a merger agreement in October. This is a follow-up to an earlier report this week that the two companies were in serious discussions, and fleshes out one or two details, though at least one seems off. The report suggests SoftBank’s stake might be as high as 40-50% after the merger, which seems much too high given the relative value of Sprint and T-Mobile and SoftBank’s stake in the former. Sprint’s Nextel merger had disastrous results in large part because the Nextel portion was valued much too highly in a touted “merger of equals” and the company spent the next several years slashing costs fiercely in a bid to justify the price with synergies, something which led to its terrible network performance and decline in the years afterwards. So neither Sprint nor T-Mobile should want to make that mistake again. With SoftBank driving the deal, I would expect it to make concessions and end up with a much smaller stake at the end of the day. But big synergies could indeed follow as the companies merge, and their combined scale would drive much more competitive network and advertising spend, retail presence, and other big benefits in their competition with the two big carriers.
Moto X4 Brings Android One to the US and Google’s Project Fi (Sep 20, 2017)
I noted a couple of weeks back with the launch of Xiaomi’s first Android One device that the project appeared to have morphed from a low-tier emerging markets play to one focused more on the mid market, and today’s news reinforces that perception. Motorola is launching its Moto X4 device into the US market as part of the Android One project, and this $400 phone will be available on Google’s own Project Fi service as an alternative to the Nexus and Pixel phones it’s offered until now. (The Nexus phones Google has offered are, by the way, currently showing as out of stock on the Project Fi site, suggesting they’re likely to get phased out with the launch of new Pixel devices in a couple of weeks.) The Android One version isn’t the only one Motorola offers – as I noted when it was announced, the main version actually comes with Alexa baked in, something the Google version certainly won’t do. All of this is indicative of Motorola’s falling leverage with carriers, and its need to do deals with other market players to parcel up its phones in different ways to find attractive niches.
T-Mobile has announced that it’s raising the monthly usage threshold for de-prioritization during times of congestion from 32GB to 50 GB. By way of background, this threshold comes into play when customers have exceeded that amount of data consumed in a given month and then try to use the T-Mobile network in a congested area, at which point their access to the network gets prioritized below that of other users who haven’t likewise exceeded the threshold. T-Mobile had previously said that only around 3% of its customers used over the 32GB threshold, and now says just 1% of its customers use 50GB or more in a month, and of course not all of those will actually end up using the network at a congested time and place. As such, like unlimited plans in general, this announcement is solely about peace of mind for the vast majority of customers, rather than something that’s actually going to impact them in any meaningful way. It does put T-Mobile’s threshold well above those of the other carriers, so this is a useful marketing point that will cost the company essentially nothing. More broadly, of course, T-Mobile continues to have far fewer customers than either of its two larger rivals, which means it has excess capacity on its network which makes offering free and discounted services much more economically viable than it is for AT&T and Verizon, which tend to have to be more conservative in their offers.
CNBC reports that T-Mobile and Sprint are in active discussions about a stock-for-stock merger, with Deutsche Telekom likely to end up the majority owner and SoftBank a significant minority shareholder. This has always seemed the likeliest merger to come out of the recent resumption of deal talks after the end the 600MHz spectrum auction and its associated quiet period came to an end, but it’s felt like the sticking point was T-Mobile’s unwillingness to be bought out by Sprint/SoftBank. A stock-for-stock deal with Deutsche Telekom and T-Mobile ultimately calling most of the shots is likely a lot more palatable, especially for TMO CEO John Legere, who’s arguably been enormously successful running the company over the last few years and would understandably be reluctant to cede control to the Sprint side. It sounds like the two sides are still some way from a deal, and of course even if it’s finalized it will take months to go through regulatory approvals, a period that would likely see Sprint lower its investment and manage for cash flow and profitability, something that’s likely to lessen competition in the US market even before a deal closes. Following such a deal, the combined entity would at least theoretically be in a much more competitive position given its combined scale, though many of the synergies would take some time to flow through.