The impact of T-Mobile’s new strategy on TMT

Editor’s Note: For a change, this daily commentary is going up outside the paywall.

T-Mobile USA announced a plan to allow customers to upgrade mobile handsets every six months in the latest instalment in its Uncarrier strategy to brand itself as the customer-focused mobile telecom operator in the US. I believe the totality of T-Mobile’s moves will transform the TMT space significantly in the next few years. This move will add to that momentum.

At the end of this post are a slew of reports on what T-mobile announced yesterday. The overall gist is that right now, you pay a discount price for a handset because of mobile carrier subsidies. The carrier locks you in to an expensive 2-year contract to make that subsidy work so that you not only end up paying just as much for the phone through a hidden markup, you also get locked into the carrier’s network for two years without any ability to upgrade your phone. This has worked really well for mobile handset makers, especially Apple which locked up favourable deals with US operators which could end up costing those telecoms billions now that mobile is slowing.

T-Mobile USA, as the smallest of the four national mobile telecom carriers, has decided its only advantage in getting more customers is to break away from the traditional carrier model including this awful handset subsidy lock-in. And so they have launched a renewal Blitz, dubbing themselves the Uncarrier. T-Mo had the usual stuff yesterday including new cheap handsets, new mobile plans and a free handset giveaway but the important piece was that anyone can trade in their T-Mo handset under the new program and get a new phone at the same price or lower for a $10 per month fee. And you can do this every six months. This new JUMP program also includes damage, loss and theft protection.

Rather than go into detail on the specifics here, I want to talk big picture. The reality is that the TMT space is consolidating because of the move to mobile and T-Mo USA is not well-positioned for this move. A couple of years ago, the T-Mo USA German parent Telekom finally understood that this was an asset that made no strategic sense because it was not well integrated into Telekom’s core European-based strategy. So they tried to offload T-Mo USA onto AT&T. That deal was blocked on antitrust grounds and while T-Mo has been able to merge with the even smaller MetroPCS, T-Mo was left as a smallish mobile operator without any play in technology, telecom, fixed line, television or media. Customers jumped ship in droves. So T-Mo decided, not having any scale nor having any viable near-term merger opportunities, they needed to revamp and set themselves apart in order to stop the bleeding. T-Mobile USA’s head John Legere said with the JUMP plan, customers would be paying $10 a month for a few months to get the option of upgrading their phone, plus they would be financing their current handset. And the result would be that T-Mo customers would be “much less likely to consider some sort of exit.” That’s what this is all about.

For the other operators and handset makers, this is a big problem because what T-Mo is doing is ending the subsidies, cutting costs and cutting prices. And the other telcos have to follow suit or lose customers.

Let me use my own example here. I used T-Mobile until late last year. I had become fed up with T-Mo’s terrible coverage. And while I was in the middle of a two-year plan, I decided to eat the early termination fee and switch to a much cheaper T-Mo piggyback carrier called Simple Mobile. I bought the unsubsidized handset from Simple, tested their service for a few months and called T-Mo to cancel early this year. That’s when I met the Uncarrier promotion. I was told I could switch to a T-Mo pay as you go offering that was just as cheap as Simple without an early termination fee. So I did that and feel very happy having done so.

That’s a story that is being repeated everywhere. And so the other carriers are responding with massive price cuts and unlimited talk, text and data plans. Sprint was the latest to respond, cutting price and offering unlimited everything just yesterday. So what we have now is basically a price war. That is going to drive down margins and drive down earnings for the telecom operators in the US. But it also has major implications for overseas and for handset makers.

First, everyone is watching the T-Mo Uncarrier move for what it means about getting rid of the hated handset subsidy. If T-Mobile is successful, we should expect subsidies to erode both in the US and elsewhere. And this is going to reduce mobile handset earnings. This market is already slowing and the central tendency is moving to handsets with lower price points. So Apple is the handset maker that is likely going to be worst affected by this development. However, even Samsung and other handset makers should feel the pain.

Second, the move to an emphasis on pay as you go plans is a net negative for telecom margins because these plans are both lower in average revenue per customer and also transparent in terms of pricing structure, making it easy for carriers to start price wars and put downward pressure on price. That’s what we see in the US already. And I expect this trend to move to Europe and elsewhere.

The bottom line here is that the T-Mobile USA moves are good for consumers because it lowers telecom prices and makes pricing more transparent. But that is bad for the telcos and for the handset makers for exactly the same reasons. The more successful T-Mo is in achieving its aims, the more pressure it will put on others to replicate these moves.

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