Will T-Mobile US Strategy Work Long Term

September 15, 2014
By: Gary Kim

T-Mobile (News - Alert) US added 760,000 branded net customers in the month of August 2014, the best month ever in terms of postpaid net additions, says CEO John Legere.

"We had our biggest net add postpaid month in the history of the company in August," with 552,000 postpaid net additions, he said. The company also had 208,000 prepaid net additions in August.

Consider that T-Mobile US added 672,000 net new customers in the third quarter of 2013 and 1.01 million net subscriber additions for the entire second quarter of 2014. In other words, T-Mobile US subscriber growth rates might be increasing.

But that poses a strategic problem. T-Mobile US arguably is gaining those customers because of aggressive price cuts.

And that translates into lower revenue per account and therefore lower profit margins and possibly earnings. Where some analysts had forecasted T-Mobile US 2015 earnings of about $1.12 per share, some now have revised those estimates lower, to about $0.80 per share.

That is the problem with price wars launched by upstarts or attackers: volume grows, but revenue per net add tends to fall. So the attacker runs a race: trying to grow customer volume faster than per-account revenues dip.

Not to be cynical, but the strategy works best for current management and shareholders if T-Mobile US is able to attract a buyer. That makes the long-term problem the new owners’ problem.

The strategy is not new. Scores to hundreds of firms founded in the middle 1990s essentially had a “we will be bought” business strategy.

Long term did not matter, because the founders expected the assets to be purchased, creating a liquidity event for the founders, and obviating the need for an actual long-term operating strategy.

Most observers would guess that the T-Mobile US “gain traction and then sell” effort will work, for existing management. Most believe T-Mobile US will be acquired, possibly in early 2015.

The new owners will have to see whether the price attack strategy is viable long term, especially if Sprint continues to try and wrest the “best value” position away from T-Mobile US, while AT&T and Verizon (News - Alert) make their own adjustments to the price attacks by T-Mobile US and Sprint.

Some might argue a financially strong buyer with other assets, or a buyer with a radically different cost structure, might be able to sustain a long attack. Others might argue that, ultimately, the T-Mobile US attack will taper off and then end, as a new owner tries to boost actual earnings.

Even Sprint (News - Alert), which some argue now has a deep-pocketed owner, likely cannot sustain an indefinite price assault. At some point, once sufficient scale has been gained, or if the attack fails, the desire to continue with a dangerous price war will wane.

So it is too early to determine whether the furious T-Mobile US initiated price war will work long term, even if it succeeds in the short term by positioning T-Mobile US for sale.

The new owners will have to figure all that out.




Edited by Maurice Nagle