T-Mobile’s (TMUS) Un-carrier event is always interesting, as CEO John Legere usually unveils some service or product that differs from the wireless business norm.
In its most recent Un-carrier X event, T-Mobile unveiled “Binge On,” where TMUS is offering free video streaming for 24 initial partners and any other streaming video service provider that wants to join.
Given how rapidly video has moved to mobile devices, this might seem like a catalyst to drive subscriber growth for T-Mobile. And while that’s possible, the move is also really bad for the future of TMUS stock.
Binge On!
With the exception of YouTube, T-Mobile’s new Binge On service allows users to watch content without draining their data from all the top streaming services, like Netflix (NFLX), HBO, Sling TV, Watch ESPN, Showtime and Hulu.
According to Legere, mobile video viewing is a big reason that customers are being hit with either pricey overage charges or forced to upgrade their data plans to packages they don’t need.
Legere points out a couple of statistics that really illustrate how this Un-carrier event is as disruptive to the wireless industry’s typical business model as past events. First, carriers collect $2.4 billion annually in overage charges. Second, wireless users will pay $45 billion this year for unused data.
The latter is free money for carriers, earnings for unused services, and growing mobile video use is a big reason why customers are hiking data plans or being charged overage fees.
Legere Limits T-Mobile’s Growth Options
With that said, one could make a great argument that Legere and T-Mobile just exited a $45 billion industry, and because the data is unused, it is a high-margin industry. But more importantly, TMUS just limited itself in what will be its fastest growing business over the next four years.
Most realize that TMUS has accounted for just about all of the U.S. wireless industry’s subscriber growth over the last two years, which has had a positive effect on T-Mobile stock. However, subscriber growth in the U.S. wireless arena is a very limited business, as the market itself is mature. Therefore, most of T-Mobile’s growth comes from its ability to recruit subscribers from competing carriers, and as you can see, Legere has had to get quite aggressive with promotions in order to do so.
Nevertheless, subscriber growth is not a booming business, but data consumption is. According to Cisco, 4.2 exabytes of mobile data per month will be consumed globally in 2015, but by 2019, that number will rise to 24.3.
From 2014 through 2019, it averages out to a compound annualized growth rate of 57% for mobile data consumption. This is growth that TMUS will never find via subscriber or connection growth.
Why Binge On Hurts TMUS Stock
Keep in mind, wireless companies sell data packages, and if customers use more data, they have to pay more for larger data packages. Theoretically, this sequence of events should play out over the next few years as data consumption skyrockets. And one of the biggest reasons for this surge in data is video.
Currently, video accounts for 55% of all mobile data traffic, but by 2019 that figure will rise to 72%. That’s because mobile video will grow at a compound annualized rate of 66% through 2019, accounting for 17.4 of the 24.3 exabytes per month consumed.
In other words, T-Mobile is going to strain its network, pay billions of dollars to increase network capacity amid this growth … and isn’t going to collect one penny from the data consumption that’s caused by mobile video. In essence, T-Mobile’s latest move didn’t only eliminate it from a $45 billion business opportunity, but also exited the company from its fastest-growing industry.
What’s the Big deal?
All things considered, TMUS stock should have crashed 20% following its latest Un-carrier event. Instead, TMUS stock has not fallen, as the company has convinced investors that market share gains and subscriber growth outweigh positive free cash flow and growth initiatives.
Legere’s notion is that subscriber growth is best for TMUS long-term, but that’s only true if T-Mobile can monetize those users in a profitable manner and grow its average revenue per user.
Looking ahead, T-Mobile made a big move, one that will be hard to undo, and unfortunately for TMUS stock, it is a move that will likely limit its upside growth from data consumption at a time when its competitors will see surging data growth.
Hence, none of this bodes well for the T-Mobile stock price long-term, a fact that TMUS stock investors are sure to realize sooner or later.
As of this writing, Brian Nichols did not hold a position in any of the aforementioned securities.
