Is T-Mobile Changing the Game?
In January, T-Mobile announced it's Uncarrier 4.0 initiative which turned the wireless industry upside down. So what does this mean for T-Mobile's future?
Customer Growth
T-Mobile's strategy is focused on customer acquisition. In the fourth quarter of 2012, the company lost 515,000 customers (churn rate of 2.5%). In the fourth quarter of last year, 1.6 million net customers were added (churn rate of 1.7%) as a result of Uncarrier 3.0. It remains to be seen how these numbers will change in the first quarter of 2014, but all signs indicate that the churn rate will stay relatively the same while net customer additions will increase.
However, all of this comes at a price. Last quarter, the company lost $20 million and acquisition costs increased to $317 per customer. These numbers will likely increase next quarter as losses widen.
The strategy of spending large amounts of money to acquire customers is not new. Software companies have been doing it for decades. T-Mobile is counting on aggregate lifetime costs exceeding short term losses. And that's what's most concerning.
Customers are not very loyal in the wireless industry. The average lifetime of a customer is about 48 months and this number has been steadily dropping over the last 5 years. Price wars have largely fueled the decline. To a lesser extent, the emergence of small market carriers and Mobile Virtual Network Operators has also caused customers to jump ship. To compound the problem, loyalty benefits are becoming increasingly rare.
If T-Mobile's plan hinges on the expectation that its return on investment will be realized in 5 years, it may be in for a rude awakening. Without a proper loyalty program, T-Mobile's churn rate is liable to increase back to 2.5+%.
For T-Mobile's strategy to succeed, it must add a large volume of customers. This is because T-Mobile's plans cost an average of $12 less than the competition. Historically, this has been T-Mobile's strongest selling point and it's unlikely to change. To operate at the same margins, the company must either sizably reduce operating costs or dramatically increase its customer base.
The competition
While T-Mobile has garnered all the press attention, other carriers have responded. AT&T has reduced plan prices, offered discounts to new customers, and mimicked T-Mobile's JUMP! program with AT&T Next. Verizon has revamped its data plans by offering more data for the same price point, as well as discounts to new customers.
Traditionally, AT&T and T-Mobile have engaged in price wars while Verizon has watched from a distance. With its outstanding coverage and extensive LTE deployment, Verizon has been able to charge customers a premium to use its network. However, rapid deployment by other carriers may pressure the red giant into pursuing aggressive pricing. How soon will that be? When Verizon's historically low churn rates approach 2-3%, expect big changes from the carrier.
Similarly, Sprint has not been one to follow the footsteps of others. Since it's costly WiMAX blunder, Sprint has chosen a reactionary approach with unlimited data as a major selling point. However, T-Mobile has already begun to match Sprint's value proposition leaving the carrier in a difficult position to remain competitive.
The end of an era?
Do all the recent events signal the end of device subsidies, roaming charges, and two year contracts?
On December, AT&T CEO Randall Stephenson said,
As you approach 90 percent [smartphone] penetration, you move into maintenance mode. That means more device upgrades. And the model has to change. You can't afford to subsidize devices like that.
With carriers restructuring their contract models and offering early upgrade programs, device subsidies are indeed on their way out. As long as two year contracts exist so will subsidized phones, but the number of qualifying phones will decrease.
Today, wireless carriers earn less than 10% of their revenue from roaming charges. With T-Mobile effectively eliminating these charges, other carriers will quickly follow suit. All major wireless providers will quickly rebrand their marketing from "America's fastest LTE network" to "The world's fastest LTE network".
The elimination of two year contracts is a radical proposal. This has long been the bread and butter of wireless carriers to generate large profit margins and trap customers. Carriers will be very reluctant to revise their proven revenue model.
Since the Uncarrier initiatives, T-Mobile has revealed that most of its net customer additions have come from Sprint. If T-Mobile continues to steal from Sprint's subscription base, AT&T and Verizon will not feel threatened enough to consider killing two year contracts. Even if T-Mobile can show significant defection from AT&T and Verizon in 2014-2015, the two giants will exhaust every option of reducing plan pricing before abandoning the contract business model.
Of course, these are not the only changes that consumers would like to see. Customers shouldn't be charged separately for voice, data, and SMS when 4G standards clearly dictate the use of IP datagrams for all services. Ideally, a single data plan should encompass voice calling and texting. SMS, by itself, is also a control plane feature using non-access stratum over LTE. A markup fee for such a feature should be eliminated. If a provider such as T-Mobile were to implement these changes, it would completely redefine wireless service offerings.
LTE vs. wireline
As carriers prepare for changes in their business models, there are new opportunities to earn revenue. One such opportunity lies in wireline broadband Internet.
Cable providers dominate the broadband Internet market in the US. DSL is another popular technology provided by cellular service providers such as AT&T and Verizon, but DSL often lags behind cable in terms of speed. Wireless carriers also have difficulty scaling both DSL and LTE networks at the same time.
The current state of access networks is abysmal and it's largely due to the monopoly cable and DSL operators have within their regions. As user data traffic increases at an exponential rate, wireline access technology is barely keeping pace.
Today, peak LTE throughput is comparable to average cable throughput. This doesn't mean consumers can ditch their cable Internet provider—far from it. This merely illustrates the relatively narrow gap between cable and LTE that wireless carriers can exploit. Under DOCSIS 3.0+ (Data Over Cable Service Interface Specification), cable providers can push towards gigabit connectivity, but long market dominance has deincentivized aggressive access network improvements.
To compound the problem, CDNs (content distribution networks) such as Google, Microsoft, and Facebook have entered the infrastructure domain by offering or directly funding FTTH/PON (fiber to the home / passive optical network) and HFC (hybrid fiber cable) networks to promote global connectivity. Although their efforts are small scale at the moment, they introduce further fragmentation within the broadband industry.
Wireless carriers have spent the last decade restructuring macrocells to microcells in an effort to manage data capacity. In 2009, femtocells were introduced to reduce network strain by utilizing wireline access networks for data offloading. They were not a commercial success, but femtocells (and picocells) may make a resurgence in the next few years for very different reasons. Wireless providers may bring about the advent of PANs (personal area networks) as they compete against cable ISPs.
Wireless carriers are in a unique position to compete directly with wireline providers. As LTE pushes towards 4G standards to carry all data over IP, cellular providers will develop the most complex and comprehensive broadband Internet service.
Telecom cloud
Cloud technology has revolutionized the software industry and commodity cloud networks have introduced SaaS (software as a service) and PaaS (platform as a service) business models. Telecom operators can leverage their existing networks to offer cloud services in similar and extended fashion.
As the world prepares for the Internet of Things, cloud based computing platforms will proliferate consumer and business sectors. Today OTT (over-the-top) providers, such as Google and Amazon, offer on-demand services through service level agreements with Tier 1 ISPs. Wireless operators can utilize their existing infrastructure to provide communication services and compete directly with commodity cloud companies. Network operators can also offer QoS guarantees that are not cost prohibitive to small and medium size enterprises.
Wireless providers can also abstract cloud connectivity from cloud applications. Currently, OTT web services are tied to a single (multiple only for redundancy) communications vendor. By injecting competition in the vendor space, customization will be possible and potential cost savings will be transferred to customers. By directly managing resources, wireless carriers can also implement caching and data pipelining features across their global networks for high connectivity and availability.
There are various other opportunities within the cloud sector that network providers can explore. These include hybrid distributed computing infrastructure, cloud services management, M2M (machine-to-machine) platforms, and data partnerships for advertising. Carriers such as AT&T have already begun deployment of cloud services, but there is plenty of work left to be done before the solutions become mature.
The Future of T-Mobile
So what does all of this mean for the future of T-Mobile? Since the AT&T acquisition failed in 2011, T-Mobile has redoubled it's efforts to survive in an industry largely dominated by Verizon and AT&T. To date, the carrier has 46.6 million subscribers which is 7.3 million less than the third leading carrier, Sprint. These numbers pale in comparison to Verizon and AT&T who each boast a subscription base of over 100 million.
With the company's recent reinvestment into its network, T-Mobile is poised to challenge Sprint. However, T-Mobile's future is still very much in jeopardy. It will take a series of brilliant moves by John Legere to ensure long term success. In its current state, T-Mobile is a prime target for acquisition.