T-Mobile Looks for a Road to Survival

by Cynthia Wilson | February 24, 2012 9:34 am

T-Mobile Looks for a Road to Survival

USA T-Mobile walked away with $3 billion in cash and extra spectrum after AT&T (NYSE:T[1]) abandoned its bid to buy the No. 4 carrier last December. But AT&T, Verizon (NYSE:VZ[2]), and Sprint (NYSE:S[3]) apparently walked away with more of T-Mobile’s customers.

A subsidiary of Germany’s Deutsche Telekom (PINK:DTEGY[4]), T-Mobile said it lost 1.65 million contract subscribers last year, including 802,000 net contract subscribers in the fourth quarter. The main and perhaps sole reason for most of the defections: T-Mobile doesn’t sell Apple’s (NASDAQ:AAPL[5]) iPhone. T-Mobile said that service revenue fell 2.7% year over year, to $4.6 billion, in the fourth quarter because of customer losses.

Sprint, the nation’s No. 3 wireless carrier, also had been losing subscribers until it added the iPhone in October, joining Verizon, which started selling the phone a year ago, and AT&T, which once had exclusive rights to sell the phone. With Sprint also marketing the device, iPhone activations in the U.S. reached a record 13.7 million over three months and helped Sprint increase its contract subscriber base, including 1.8 million iPhone subscribers.

Even though T-Mobile has no agreement to sell the iPhone, its CEO, Philipp Humm, said the company is still open to carrying the device under the right terms. Carriers that sell the iPhone do so at a steep discount to customers so that the iPhone will remain competitively priced with other smartphones, while paying the difference to Apple. That arrangement led AT&T, Verizon, and Sprint to post losses during the fourth quarter. The trade-off: they picked up, or at least retained, customers who are likely to buy premium-price data plans. So T-Mobile investors shouldn’t count on the company getting better terms from Apple to sell the iPhone.

An essential network upgrade

Even without the iPhone, T-Mobile executives insist, the company can turn the tide by investing in its network, which includes sizable 4G CDMA-HSPA capacity but isn’t compatible with the 4G LTE (long-term evolution) technology used by its competitors. Phones sold by T-Mobile, in other words, have to be made specifically for the CDMA-HSPA standard, while most phone makers are focused on accommodating the LTE standard.

So T-Mobile says it will spend additional $4 billion over two years to convert its network to LTE and win back clients who want faster access to multimedia content. That outlay includes $1.4 billion more than previously budgeted for the network upgrade, and it will include the introduction next year of a high-speed wireless data service operating on LTE technology that T-Mobile inherited from AT&T after the merger collapsed. Verizon already uses LTE technology and Sprint is transitioning to 4G LTE coverage later this year.

The transition to LTE might at least give T-Mobile a fighting chance to compete with its rivals, although none of the three likely is too concerned about T-Mobile stealing market share. The dominant player could end up being Verizon if it succeeds in its long-planned bid to buy spectrum from four cable companies.

But with churn the major issue for T-Mobile, despite its national network and low subscriber rates, it’s possible that T-Mobile is investing in the network to boost its appeal as an acquisition target. With Sprint also investing in its LTE network, T-Mobile’s initiative may be enough to launch new merger talks between the two companies.

Endnotes:
  1. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  2. VZ: http://studio-5.financialcontent.com/investplace/quote?Symbol=VZ
  3. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  4. DTEGY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DTEGY
  5. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL

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