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.