T-Mobile US Inc (NASDAQ:TMUS) has bought a Denver-based startup to implement what CEO John Legere calls “Un-Carrier TV.” So far, the stock market is unimpressed and the TMUS stock price shows it.
Layer3 TV is currently selling a bundle of cable channels in a few U.S. cities, including Chicago, Washington, Los Angeles and Denver. Its encoding technology, which Apple Inc. (NASDAQ:AAPL) used in its iOS 11 and macOS High Sierra operating systems, requires only 4 Mbps to deliver an HD TV channel signal, not the 10 Mbps other systems require.
This means the service, which includes its own set-top box with a Digital Video Recorder, could in theory get a quick national rollout. Legere is selling the idea that he’s going after the “most hated” monopolies in the country, cable operators like AT&T Inc. (NYSE:T) Comcast Corporation (NASDAQ:CMCSA)
The question is, does his plan have a chance and what will it mean for TMUS stock?
The Next Step in Mobile Internet
While Legere is focusing on competition with wired cable, the key to success is 5G wireless, a service the company announced in May using $8 billion of 600 MHz spectrum the company bought in the latest wireless auction.
A lower-bandwidth encoding technology would make TV as easy to deliver on 5G as telephony, because T-Mobile’s tests show it running at 1.8 GBps. The problem is that the term “5G” means different things to different carriers.
While T-Mobile is deploying it on low frequency bands, for instance, Verizon Communications Inc. (NASDAQ:VZ) is deploying it on high millimeter-wave bands as a home Internet solution.
It’s the home Internet business that T-Mobile must eventually disrupt, writes Sascha Segan of PC Magazine. The wires may be closed-off.
The ending of “net neutrality” means incumbent carriers like Comcast and AT&T could legally block the new T-Mobile service, or slow it to a crawl. Thus, most analysts came away unimpressed by Legere’s statement and TMUS stock has fallen in its wake.
Getting Around the Monopoly
Assuming it hits its “whisper number” with revenue of $10.86 billion for the quarter ending this month, T-Mobile should have about $41 billion in revenue for 2017, up from $37 billion in 2016 and $32 billion in 2015.
This is a lower price-to-sales ratio than rival Sprint Corp (NASDAQ:S), with which it broke off merger talks in October. The growth, however, should give it a premium price.
T-Mobile needs a high stock price to afford its 5G rollout, as it already has $21 billion in long-term debt on $66 billion in assets. The 5G rollout would have been simpler with Sprint by his side, but as it is Legere must keep up the hype to introduce the new technology without enormous financial strain.
If he can deliver 5G nationwide quickly using low frequencies, then Layer3 gives TMUS something to offer over the new service and could draw revenue quickly. While other carriers see 5G as merely a complement to their existing services, Legere sees it as a chance to offer something entirely new.
The Bottom Line
T-Mobile likes people to see it as a rule-breaking company. That’s why Legere wears long hair, leather jackets and t-shirts instead of the staid business suits he wore at Global Crossing, his previous company, which was bought by Level 3 Communications in 2011. Level 3 was acquired by Centurylink Inc (NYSE:CTL) in November.
Legere has been a winner for investors, the stock up 257% in five years. But 2017 has been tough, a gain of just 9%. If Legere can deliver on his promises, Layer3 could make 2018 more like 2016, when the stock rose 45%.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in T.
