T-Mobile USA Inc.’s position as the nation’s fourth-largest wireless operator, as well as one of the industry’s fastest growing, might not be enough to guarantee its long-term prospects. Several industry observers have questioned the carrier’s ability to remain a standalone entity in the face of increasing competitive pressure from much larger wireless operators, as well as carriers that can offer more robust telecommunications services.
“There is no future for T-Mobile,” said Iain Gillott, principal at iGillott-Research. “I think in one year to 18 months [T-Mobile USA] will be part of Cingular [Wireless L.L.C.].”
Gillott said he bases his prediction on T-Mobile USA’s current dearth of spectrum, which is keeping the carrier from launching wide-area high-speed data services, as well as its inability to leverage a more robust telecom offering. Even a smaller operator like Alltel Corp., which is in the process of acquiring Western Wireless Corp. and strengthening its position as the largest regional operator, has a more solid future as it can offer customers bundled services from its wireline operations, Gillot said. “The only thing worse than being a wireless carrier without a wireline offering is being a LEC without a wireless play.”
Gillott noted that he thought a likely end-game for T-Mobile USA and parent company, Deutsche Telekom AG, would be a 10-percent ownership stake in an enlarged Cingular, with current Cingular partners SBC Communications Inc. and BellSouth Corp. each reducing their ownership stakes by 5 percent to 55 percent and 35 percent respectively.
DT’s management has downplayed any sort of partnership or selloff of its U.S. wireless operations, noting T-Mobile USA has accounted for much of its wireless growth over the past several quarters.While acknowledging that anything is possible, N. Moore Capital Ltd. President Jeffrey Hines said it is unlikely the government would approve further consolidation beyond what is already on the docket. Hines added that T-Mobile USA has also become too valuable to DT-which purchased then VoiceStream in 2002 for $30 billion-to be sold without garnering a premium.
“An outright sale is possible, but I think T-Mobile USA is still the brightest star in T-Mobile’s international operations, which is the brightest star in Deutsche Telekom’s operations,” Hines said.
Hines also downplayed T-Mobile USA’s position as the country’s smallest nationwide operator by noting that the carrier is the only operator with a true international presence that can more than make up for the scale it lacks in the domestic market.
“[T-Mobile USA] may be a distant fourth among domestic carriers, but it’s part of a much larger international organization that can offset that deficit,” Hines added.
T-Mobile USA chief executive Robert Dotson raised a similar point late last year when questioned about the carrier’s position in the U.S. market following Sprint Corp.’s merger agreement with Nextel Communications Inc.
American Technology Research telecom industry analyst Albert Lin noted that several factors are conspiring against T-Mobile USA, including an increasing emphasis on family and in-network calling plans. Lin explained that roughly half of all customer additions are coming from family-plan offerings-which often include free in-network calls-and with one of the smallest customer bases of the nationwide operators, T-Mobile USA’s offering is suffering.
“They just can’t compete on the same scale as Cingular, Verizon and eventually Sprint Nextel,” Lin said.
T-Mobile USA serves more than 17 million wireless subscribers using a nationwide GSM network and during the past several quarters has posted some of the highest customer growth in the industry. But that rapid growth is expected to slow. Analysts predict the carrier will post a respectable 800,000 net subscriber additions in the first quarter, which would be T-Mobile USA’s slowest-growth quarter since mid-2003. Analysts also expect T-Mobile USA’s 2005 full-year growth results to be closer to the 3.2 million subscribers it added in 2003 than the 4.2 million customers it added last year.
Lin said a likely scenario for T-Mobile USA could be some sort of partnership with a U.S.-based wireline operator looking for a strong wireless play. A partnership with Qwest Communications International Inc., which sold its limited wireless operations to Verizon Wireless and today offers wireless services through a partnership with Sprint Corp., would make more sense than an acquisition by Cingular, Lin commented.
“I think that chance (of a merger between Cingular and T-Mobile) has come and gone,” Lin said. “Once Cingular decided to buy AT&T Wireless, the prospects for a deal with T-Mobile ended.”
Hines also echoed Lin’s comments that T-Mobile USA could shore up any of its offering deficiencies with a partnership that could spread beyond traditional wireline operators.
“I don’t think a partnership would be limited to a wireline company,” Hines said. “It might make sense for [T-Mobile USA] to look at a company like Vonage [Holdings Corp.] or even a partnership with a cable company.”
Further blighting T-Mobile USA’s future is its admitted spectrum shortage, which has prevented the carrier from announcing any plans to launch a wide-area high-speed wireless service. The carrier offers GPRS services across its network and is expected to launch a higher-speed EDGE solution sometime this year. But the carrier lacks the clean spectrum needed for a W-CDMA deployment.
UBS recently noted that T-Mobile USA controlled an average of 26.5 megahertz of spectrum in the nation’s top 100 markets, which was significantly below the 40 megahertz controlled by Verizon Wireless, 51 megahertz controlled by a combined Sprint Nextel, and less than half the 57 megahertz controlled by Cingular.
Many industry analysts were surprised that T-Mobile USA was not more aggressive in Auction 58, where spectrum was offered in a number of markets where T-Mobile USA’s holdings are either low or non-existent. Some have noted that T-Mobile USA passing on several licenses in North Carolina and South Carolina-where it lacks service-was because the carrier is interested in acquiring regional operator Triton PCS Inc., which has a strong GSM network and footprint in the Southeast.
Others noted that because T-Mobile USA is so spectrally deficient across its entire network, it did not make sense for the carrier to overbid on building up portions of its network and instead save its money for future nationwide spectrum auctions.
T-Mobile USA’s Dotson noted late last year that the carrier had a $1.3 billion budget for buying additional spectrum, but those spending plans have been modest to date.
Hines noted that an acquisition of Triton, as well as deals for other regional operators like Dobson Communications Corp. and even Alltel, could be options for T-Mobile USA and would boost the carrier’s network coverage and customer base to around 30 million subscribers.
Another thorn in T-Mobile USA’s side has come from the burgeoning mobile virtual network operator market, which many analysts have claimed is zeroing in on T-Mobile USA’s niche as the value wireless provider. Most of the current MVNO offerings are targeting the prepaid and credit-challenged markets, which are seen as prime candidates for T-Mobile USA’s services.
“At the end of the day, all T-Mobile [USA] can offer is a commodity voice service that is just that, a commodity voice service-and MVNOs will begin to take away that proposition,” Gillott said.
In an attempt to perhaps stem some of those losses, T-Mobile USA recently launched a new advertising campaign touting its prepaid service offering. The advertisements stress the straightforward nature of the service as opposed to the myriad of per-minute and daily charges offered by its competitors.
Gillott also downplayed claims that T-Mobile USA could broaden its future by becoming a conduit for the burgeoning MVNO market.
“I don’t see that as a realistic option,” Gillott said. “T-Mobile is not known for having strong network coverage, and it’s already short on spectrum just serving its own customer needs. Most MVNOs are looking at some sort of data offering to differentiate themselves, which T-Mobile [USA] can’t offer.”
