Reality Check: T-Mobile US wins by a mile (and why Sprint must act – now)

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.
Before we dive into part two of first quarter earnings news, the cable world was reshaped last week as a multi-part transaction between Time Warner Cable, Comcast and Charter was announced. The highlights of the transaction are as follows:

The result of this transaction to Charter is a loss of California (Los Angeles area), New England, Tennessee, Texas and North Carolina properties, but a terrific clustering of Great Lakes properties.

Charter gets Detroit, Cleveland, Columbus, Cincinnati, Louisville and Minneapolis. They do not get Chicago, Kansas City or Nashville. And they keep the former Bresnan properties in the west, which are very profitable and well engineered. These clusterings should help Charter’s commercial business move from local to regional services, and also enable significant Ethernet backhaul opportunities for bandwidth augments. It also enables an East/West Coast (plus Texas, Chicago and Denver) business capability for Comcast. Many of you who know the cable industry also have pointed out that further regional concentration for Charter would be possible with Suddenlink (West Virginia) or Mediacom (Missouri and Iowa) additions.
Bottom line: It’s a multi-part good news story for Charter and the new Comcast/TWC.
Chairman Wheeler: Don’t make me use Title II
This week, Federal Communications Commission Chairman Tom Wheeler gave an impassioned speech to a much different cable industry than the one he represented three decades ago. It was clear from the speech that he is not interested in creating different quality networks, although he seemed to have no issues with the creation of priority lanes provided that total bandwidth continued to grow.
Let me be clear. If someone acts to divide the Internet between “haves” and “have-nots,” we will use
every power at our disposal to stop it. I consider that to include Title II. Just because it is my strong belief that following the court’s road map will produce similar protections more quickly, does not mean I will hesitate to use Title II if warranted. And, in our notice, we are asking for input as to whether this
approach should be used.
The fly in the cable punch bowl is Title II. The mere concepts of providing service upon request at just and reasonable rates would fundamentally change the business structure of cable. And, the concept of providing interconnection to cable’s access network (and building associated wholesale networks for residential and small business sale) would be a disastrous distraction for the industry.
Having heard the speech at the NCTA show, I think Chairman Wheeler used the threat of Title II very effectively. It seems to be clear from several conversations at the show that the FCC will trade off some Title II requirements (e.g., Comcast agrees to serve marginally profitable areas not covered by the Connect America Fund) in exchange for approval of the Comcast/Time Warner Cable merger. In addition, it seemed patently clear that any postponement of speed upgrade schedules would receive a swift response from the FCC.
Bottom Line: Chairman Wheeler delivered a short but pointed “don’t make me pull this car over” speech. Given his authority to regulate under Title II, as well as Google and AT&T’s equally important regulatory influence, the cable industry should be concerned.
T-Mobile US wins – by a mile (and why Sprint must act – now)
While there were many other interesting events this week (including U.S. Cellular earnings, and TDS’ acquisition announcement of Bend Broadband), the remainder of this column will be devoted to comparing Sprint and T-Mobile US’ earnings.
Sprint is a company in parallel transitions. The network is being completely replaced. Unlimited plans, the hallmark of Sprint’s turnaround a few years ago, are being completely replaced. Management is being replaced.
T-Mobile US is also a company in transition. Their data network is being upgraded. Unlimited (and therefore overage-free) plans have been implemented. Major spectrum and company acquisitions are in the various stages of implementation, but a lot of work remains to be done. Their management has been in place less than two years (remember the wound-licking from the previous management team displayed with T-Mobile US’ Q1 2012 results?).
Both companies have done a lot over the past two years. In the first quarter, however, T-Mobile US won by a mile. Within postpaid retail phone customers, T-Mobile US gained 1.2 million subscribers and Sprint lost 750,000. That’s a quarterly change between the No. 3 and No. 4 players of nearly two million subscribers. Below are two charts outlining the relative size and position between Sprint and T-Mobile US on postpaid retail and prepaid retail customers (left axis on both chart is in 000s):


We have talked at length about T-Mobile US’ relative parity with retail prepaid customers. To be consistently within 10% of Sprint’s size (given the brand strength of Boost Mobile and Virgin Mobile) is impressive. In the first quarter, however, T-Mobile US, thanks to MetroPCS expansion, narrowed the gap considerably, while Sprint shrank.
Given the uncertainty of Sprint’s prepaid mix (many of whom are subject to income verification requirements in order to receive government subsidized devices), it’s likely that T-Mobile US’ retail prepaid customer base will exceed Sprint’s by the second quarter. By the end of the year, AT&T Mobility (through their recently acquired Cricket brand) will join T-Mobile US as a competitor for prepaid distribution. And those three retail brands compete heavily against Tracfone, who is using excess voice/text/3G data capacity from Verizon Wireless (and Sprint/AT&T Mobility).
The greater concern for Sprint is the chart on the right. Before T-Mobile US’ Simple Choice, the iPhone and now network-indifferent tablet pricing, making the case for a larger T-Mobile US was nearly impossible. Now, it’s a question of “when will the two lines cross?” Can T-Mobile US overtake Sprint in postpaid subscribers in 2015? At the end of Q1 2013, the postpaid gap was 11.2 million subscribers; last quarter it was 6.9 million subscribers. Using 2013’s progress as a trend line, T-Mobile US should overtake Sprint on postpaid subscribers in Q3 2015. And, if the subscriber gap is narrowed first with smartphone customers, the revenue gap could be narrowed even faster (Sprint had $1.4 billion more in total wireless revenues in Q1 2014 compared to $2.1 billion more on a pro forma basis in Q1 2013).
Once T-Mobile US overtakes Sprint on postpaid subscribers and revenues (and, in 2016, on earnings before interest, taxes, depreciation and amortization), will Sprint be the acquiring party? Sprint needs to act now in three ways:
1. Sprint has to make the case that the cable industry’s coordinated Wi-Fi plans (especially with the recent 5 GHz Wi-Fi spectrum and auction announcement) represent a competitive network. The fact that every new cable modem installed by Comcast from now on includes a CableWi-Fi connection option should be enough of an indicator that the cable companies are competing for gigabytes within the home and public venue.
2. Sprint needs to follow T-Mobile US’ tablet pricing structure and eliminate the difference between Wi-Fi only and Wi-Fi+cellular tablet price points. This is a no-brainer, and Sprint’s ability to eliminate this pricing on the iPad will significantly impact gross adds.
3. Sprint needs to “go negative” on T-Mobile US in those cities where it has the stronger network. Highlight in-building/in-home differences, HD Voice quality improvements and the recently announced Spotify relationship. I doubt we’ll see Sprint’s CEO tweet in the same manner as John Legere (see actual tweet below), but network improvements will not speak by themselves. Outside of a few well-placed attacks against AT&T Wireless a decade ago, Sprint has not had an attack mentality. It needs to adopt one if they want to contend for T-Mobile US’ customers.

Both Sprint and T-Mobile US have a ways to go on in-building/in-home coverage solutions, and neither are making inroads into the enterprise marketplace, leaving an effective duopoly for AT&T and Verizon. There are plenty of cooperative opportunities Sprint and T-Mobile US can take today (prior to a business combination) that will increase coverage and quality. But Sprint needs to act quickly. The action needs to be big (e.g., acquisition of T-Mobile US) and decisive (e.g., tablet pricing). Waiting for the network will land Sprint in fourth place by the end of 2015.
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.