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.
Bloomberg reports that Comcast has over 200,000 subscribers for its Xfinity Mobile service, which launched earlier this year. At the time of the launch, I said that, “Comcast will likely sell this service to up to 10% of its base in the next couple of years, which will be a nice boost to its revenues and profits, but will make only a tiny dent in the overall US wireless market – 10% penetration of its broadband base would be just 2.5 million customers, which is less than the number of new customers the big four carriers added last quarter alone.” In other words, even with what I’d consider pretty decent take-up, Comcast wasn’t likely to make a dent in the market. So far, it would appear it’s added around 1% of the addressable base to the service, which is a decent start, but again tiny in the broader context of the market. More notable, in some ways, is the fact that the service has mostly attracted customers to its non-traditional per-gigabyte pricing model rather than the more traditional tiered bucket model, suggesting both that customers find that appealing and that Comcast might make some decent margins even at relatively small scale.
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.
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.
T-Mobile today announced its latest “Un-Carrier” move today, in one of its simplest and certainly its shortest announcement so far: it’s offering free Netflix subscriptions to subscribers to its family plans. Specifically, the offer is available to subscribers who have at least two paid voice lines on the T-Mobile One plan introduced in August last year. That’s now the standard plan for new customers, but many existing customers will be on older family plans and will need to switch to those plans, which may cost more than those offered previously. Typically, two paid lines will be $120 per month with taxes and fees included, so the annual benefit of this offer is equivalent in value to a month’s wireless service. T-Mobile has just over 12 million postpaid accounts at the moment, with an average of just under 3 lines per account, so that gives some sense of the addressable market here, although many would need to switch to T-Mobile ONE to qualify. For Netflix, the upside is smallish – a few million potential new customers over the next few years – but low risk, with these subscribers likely having lower churn.
Certainly not all of those lines would qualify today, but assume that a quarter of those accounts eventually take the Netflix offer, and it ends up being about $90 million per quarter at the full $10 price, which I’m guessing Netflix isn’t paying. More realistically, at 80% of the full retail price, the cost to T-Mobile would be closer to $70 million on a revenue base of roughly $10 billion in revenue per quarter, so the cost is likely to be far from material for the company. Conversely, the Netflix offer will likely increase loyalty and therefore reduce churn and the costs associated with it, and drive more people to the T-Mobile ONE plans and thereby increase ARPU in at least some cases, so T-Mobile will not unreasonably be hoping the net effect on margins is positive.
This move is just the latest in a long string of Un-Carrier moves from T-Mobile, the vast majority of which have been fundamentally about the price or cost of service, either discounting services or throwing in freebies, while dressing the moves up as being something more. That’s clearly worked for T-Mobile, as it’s been by far the fastest growing postpaid phone operator in the US over the last several years, and this move is likely to provide a further little boost, though not a massive one. And of course it’s worth noting that AT&T has been offering free HBO to some of its unlimited subscribers for a while too, so T-Mobile certainly isn’t the first to offer a bundle, but Netflix has broader appeal in the US than HBO and the requirements to qualify are less stringent on the T-Mobile plan.