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T-Mobile Tries to Shake Up Telecom

But will its cheaper iPhone, new pricing really make waves?


On Tuesday, T-Mobile — the fourth largest U.S. wireless provider — held an event in New York where it basically declared war on the big three carriers.

The Deutsche Telekom (PINK:DTEGY) holding has been bleeding market share, losing roughly 4 million contract customers over the past two years — a decline that many analysts (and T-Mobile itself) had laid squarely on the fact that it has been the only major carrier that hasn’t been able to offer the iPhone. Well, T-Mobile eradicated that handicap Tuesday with a slew of announcements, including the iPhone 5 (available April 12), no-contract pricing and the launch of its 4G LTE network in seven metropolitan areas.

One of the more interesting aspects of T-Mobile’s pricing plan is that it not only offers an unlocked iPhone 5 for $99.99 up front, it undercuts even Apple on the final price for the smartphone. Customers can buy out the phone at any time (the whole point of the “no contract” approach), leaving them with an unlocked iPhone 5 for $579; Apple and the other major telecoms charge $649 for the same thing.

It’s not clear whether Apple is cutting T-Mobile a deal, or if T-Mobile is swallowing the difference, but this is great for news for consumers. Of course, it also begs the question, “Could T-Mobile end up subsidizing iPhones for AT&T (NYSE:T) customers who buy an unlocked phone from T-Mobile, then waltz over to the competition?”

Still, while T-Mobile’s moves are undoubtedly good for consumers, does it change the bigger picture of the U.S. wireless industry?

There are some very big trends that are central to the U.S. mobile market and its profitability for wireless carriers. First is saturation. In 2011, the number of wireless devices in the U.S. exceeded the country’s population. This means the number of net new customers available for wireless carriers every year is small. To grow their customer bases, they must compete and attract customers from the competition, and to grow revenues, they must either attract new customers or convince customers to pay more for services.

Both of these strategies might seem like nonstarters for profitability — how do you boost profits if you cut deals to attract customers? If you raise prices, how do you keep customers from leaving for the competition?

Enter two other variables working in carriers’ favor.

The first is 4G network infrastructure investment. Wireless companies have been relentlessly investing in 4G LTE infrastructure in recent years. Verizon (NYSE:VZ) has spent more than $2 billion, AT&T is pumping an additional $8 billion into its LTE network by the end of 2014, T-Mobile will have pumped $4 billion into its LTE launch, and even the smaller players like Leap (NASDAQ:LEAP) and pending T-Mobile merger partner MetroPCS (NYSE:PCS) have been rolling out 4G coverage — either by building out their own or signing roaming deals with larger carriers.

The point here is that years of 4G investment have been taking a toll on the bottom line of carriers big and small. But that investment cycle is winding down over the next year or two, which should translate into greater profitability going forward.

The second factor is the move from feature phones to smartphones. Feature phones are what we think of as “old-school” cell phones. They’re cheap, there’s no real need to buy a data plan (although some do offer a rudimentary web browser and email) and until recently, they represented the majority of mobile devices sold in the U.S. In 2012, that changed, with smartphones like the iPhone or Samsung’s (PINK:SSNLF) Galaxy S III finally overtaking feature phones in this country. According to Pew Research, in 2012, smartphone ownership in the U.S. reached 46% of adults.

With smartphones overtaking feature phones, that means wireless carriers have greater opportunity to flog more expensive (and profitable) data packages as customers upgrade. Average Revenue per User (ARPU) is greater for smartphones than for feature phones (estimates put this in the 30% higher range), meaning that as wireless carriers push feature phones out of their lineup, their existing customers will generate more revenue.

Of course, T-Mobile’s cost cutting is going to impact the other wireless carriers as they are either forced to react (trimming their own iPhone and data plan costs), or risk customer churn, with customers jumping ship to T-Mobile once their contracts have run out.

On the other hand, if T-Mobile’s move becomes the norm, and unlocked, no-contract smartphone plans spread, customers will be free to pick up and move to any carrier based on service, price or whim, leading to increased churn across the industry.

It’s hard to predict what will ultimately happen, but given the two variables mentioned (payoff on 4G investment and significantly higher ARPU as more customers transition to smartphones), we do know that regardless of competitive pressures, carriers will have more room to move on pricing while still increasing their revenues and profits. The future looks good.

And let’s not forget Apple in all this.

The company has been beaten up over its lack of an affordable iPhone. With other wireless companies typically offering the iPhone 5 starting at $199 (on contract), Apple’s flagship smartphone was out of reach for many potential customers. Offering the latest and greatest iPhone for the same cash down that most carriers had been asking for a two-year-old model could well be the stimulus needed to reach these people. For the higher rollers who haven’t yet taken the plunge, the possibility of saving $70 on buying an unlocked iPhone 5 might be the carrot needed to seal the deal.

Either way, Apple may well see a spike in iPhone 5 sales over this, and at a crucial time as iPhone 6 (or iPhone 5S) rumors start to ramp up — an effect that has temporarily slowed the sales of Apple’s most profitable device in the past, putting a damper on profits.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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