Reality Check: T-Mobile US impact and other wireless industry trends

Editor’s Note: Welcome to our weekly Reality Check column where C-level executives and advisory firms from across the mobile industry share unique insights and experiences.
There are many drivers of change in the wireless industry, but four deserve special mention:
1. The ripples of T-Mobile US’ “Un-carrier” strategy are beginning to be seen throughout the industry. First, it was the introduction of equipment installment plans, and the separation it has driven between equipment sale and service revenue quality. As AT&T Mobility, Verizon Wireless and Sprint transition their bases from traditional subsidy (which at the end of the two-year term and beyond can have attractive economics) to EIP models, the pressure on service revenues (particularly data average revenue per account/average revenue per user growth) becomes greater. As we covered in Q1 earnings reviews, the transition of T-Mobile US’ base will be nearly complete by the end of 2014.
The most important thing to remember with these shifts, however, is the increased flexibility it provides the incumbent providers’ base of customers. Under the traditional $325 to $350 subsidy model termination penalty scheme, the perception among the base was that they were “locked” until the end of the two years. None of the new plans carry two-year contract terms, and, as Sprint and T-Mobile US have shown, they are willing to pay multi-hundred dollar termination fees to drive up gross additions. A more unstable base should have AT&T Mobility and Verizon Wireless on edge.
To add fuel to the fire, T-Mobile US launched a new program to the AT&T Mobility/Verizon Wireless base this week. For a $700 hold on your credit card, T-Mobile US will send you a new iPhone 5S for a free one-week test drive (I have confirmed with T-Mobile US that the one week starts upon iPhone receipt – something to consider when you sign up). This is not a plan that is aimed at the traditional T-Mobile US base, but one that gets current Sprint/AT&T Mobility/Verizon Wireless iPhone 5S users into a T-Mobile US store to have a conversation. If the customer is a current iPhone 4S user, they will receive a double benefit due to the 64-bit processing and LTE capabilities inherent in the 5S – a very clever move on the part of T-Mobile US.
Will this plan have the same effect as equalizing the cost of an Android Wi-Fi only tablet? Likely not. But it could erase perceptions of poor network coverage for some. While many see this move as more “carrier” than “un-carrier,” I see this as part one of a multi-part plan to reintroduce the T-Mobile US network (voice, text, data) to millions of skeptical AT&T Mobility and Verizon Wireless customers (some of whom may have previously been T-Mobile US customers). At worst, this program will provide real-time feedback on their network improvements and identify coverage gaps (and hopefully reiterate the need to begin a substantial in-building coverage initiative for T-Mobile US hopefuls who are captive to multi-story living/ working environments). At best, it will propel two million to three million gross additions through the end of 2014.
2. The drive for spectrum outside of the Federal Communications Commission auction process will continue. There have been a lot of discussions this week about Verizon Communications’ interest in Dish Network spectrum (The New York Post places a $17 billion value on the asset, and it’s very likely that Verizon’s interest is focused on Dish’s AWS-4 holdings as opposed to the 700 MHz spectrum band), and also T-Mobile US’ interest in acquiring additional 700 MHz A-Block (a.k.a., “low band”) spectrum from the likes of Paul Allen’s Vulcan Ventures (who holds the Seattle and Portland licenses) and spectrum management companies King Street and Cavalier Wireless.
We have already seen AT&T actively pursuing spectrum purchases since 2012 in the 2.3 GHz/WCS band, and this week Sprint announced their first wave of rural partnerships, which will leverage their tri-band capabilities.
With the frequency-sharing rules of the upcoming AWS-3 auction, and the “reserved/unreserved” designation for the 600 MHz auction, is anyone surprised that unrestrained and adjacent spectrum would be interesting to larger carriers? Absolutely not. Announcements serve to entice more broadcasters to participate in the 600 MHz auction process and hopefully keep additional regulations to a minimum.
Interestingly, if there is a wave of spectrum sale transactions prior to the end of the year, look for new categories of bidders (e.g., non-traditional wireless providers) to emerge for the licensed spectrum.
3. Consolidation efforts will fail, not because of Sprint’s lackluster efforts, but because of T-Mobile US’ unbelievable success. In second quarter earnings, we will see the full fruits of T-Mobile US’ early termination fee buyout initiative announced in January. Surprisingly to most (although not all), T-Mobile US’ results will equally impact Sprint and AT&T Mobility (given the process ease of SIM-card swapping between AT&T Mobility and T-Mobile US, this might be viewed as a slight victory for AT&T Mobility).
As we have discussed, the retail postpaid gap between T-Mobile US and Sprint is shrinking (if one exists in retail prepaid after 2014, I’ll be very surprised). The 11 million subscriber gap at the beginning of 2013 could be as small as four million as we exit 2014. And, considering the composition of T-Mobile US’ (smartphones) vs. Sprint’s (tablet) net additions, the revenue gap will be even smaller.
While there will be many traditional regulatory concerns, the trends beg the question: “Why should T-Mobile US take on Sprint?” Does Sprint’s base of customers provide unique differentiation? And, given a large portion of the base is still on unlimited and un-throttled LTE data plans, can the value of the customer base increase? Does Sprint’s base allow T-Mobile US to build unique capabilities in the enterprise segment, which Sprint largely abandoned in 2013 to focus on small and medium customers. Can Sprint out-innovate T-Mobile US with a new management team?
Time is not on Sprint’s side: Service revenues are shrinking, management is leaving and customers – particularly corporate liable enterprise customers – are questioning. No doubt there is a value to scale, but T-Mobile US is worth much more than $40 per share in a couple of years without Sprint. Could a cash infusion from Comcast/Time Warner or a cable consortium be a viable alternative? Does T-Mobile US even need cable as a strategic investor?
Consolidation makes good headlines, but every month that goes by without an announcement opens up better alternatives for T-Mobile US than Sprint (and makes the “why” question more difficult to answer). Remember, at the beginning of 2006, Sprint Nextel, AT&T Wireless and Verizon were basically the same size. One non-traditional strategic partner/investor could reset the equation for T-Mobile US and the industry.
4. The cable industry (as opposed to FiOS or U-verse) will unveil Wi-Fi capabilities in 2015 that will be easier to use and intensify the battle for data in the home and office. The blind spot in wireless carrier strategic plans is cable. Their Wi-Fi efforts are very close to tackling the issue of in-home (and in-office) data usage. The rollout of an additional 100 megahertz of 5 GHz Wi-Fi capacity will also fuel the bandwidth fire. More to come on this in a future column, but given the arguments presented above and in previous analyses, cable would easily eliminate up to 20% of the data upside from the wireless carriers in 2015.
These are a few of the issues wireless service providers face, but they cover nearly every aspect of the business environment: non-traditional competitors presenting real substitutes; traditional competitors redefining the buying process; increases in supply; new regulations; and the increasing sophistication of smartphones and tablets are but a few of the dynamics that will be discussed around the strategic planning table. Who wins is anyone’s guess. But every carrier will attempt to move the needle.
Jim Patterson is CEO of Patterson Advisory Group, a tactical consulting and advisory services firm dedicated to the telecommunications industry. Previously, he was EVP – Business Development for Infotel Broadband Services Ltd., the 4G service provider for Reliance Industries Ltd. Patterson also co-founded Mobile Symmetry, an identity-focused applications platform for wireless broadband carriers that was acquired by Infotel in 2011. Prior to Mobile Symmetry, Patterson was President – Wholesale Services for Sprint and has a career that spans over twenty years in telecom and technology. Patterson welcomes your comments at jim@pattersonadvice.com and you can follow him on Twitter @pattersonadvice.