What Next for T-Mobile USA?

AT&T easily will survive any failure of its bid to buy T-Mobile USA. T-Mobile USA, on the other hand, will continue to face strategic problems. A distant fourth in the U.S. mobile market, with no spectrum available to launch a fourth-generation network, T-Mobile USA either has to spend lots more money to try and catch up to AT&T and Verizon Wireless, or must exit the U.S. market. Few think its parent, Deutsche Telekom, has the appetite for investing.


That suggests T-Mobile USA will still be looking to sell, in the event of a failure of the AT&T bid to buy T-Mobile USA. One issue is the pool of potential buyers. But a significant strategic issue is the value of the asset in a mobile market where being "in the middle" is difficult.


AT&T and Verizon Wireless clearly lead the higher end of the market. Many other larger-regional providers lead the lower end of the market, especially the prepaid segment. That leaves firms such as Sprint and T-Mobile USA in an arguably exposed position, vulnerable to lower-cost providers on the lower end and pressure from the market leaders at the top. 


At a practical level, competing with the larger national contestants means heavy advertising and marketing costs. In some cases, the regional providers can be more targeted about such spending. And that's part of the rub. The providers of lower-cost prepaid services succeed in part by controlling their overhead costs, allowing them to offer lower prices. 


The contrast is perhaps not so stark as the positioning of a mass market retailer between Tiffany and Wal-Mart, or between Tiffany and Amazon.com, but it is the same general problem. 

T-Mobile USA has lost 850,000 contract customers in 2011. In the third quarter, sales fell 2.3 percent to $5.23 billion, though earnings rose 3.8 percent to $332 million. One wonders if earnings rose because T-Mobile USA essentially stopped investing as it would have, if it thought it was going to be an on-going business.

T-Mobile gained 826,000 prepaid customers in this year's first nine months of 2011. The problem is that profit margins for such customers are lower than margins for prepaid customers. Also, T-Mobile USA is the only service provide of the top four without the ability to sell the Apple iPhone. Deutsche Telekom's unsolved problem

Spectrum assets are another issue. T-Mobile USA’s CEO, Philipp Humm, made the point at a May 2011 hearing on the merger before the Senate Judiciary Committee. “As data usage continues to explode, spectrum is becoming a constraint to our business, with T-Mobile facing spectrum exhaust over the next couple of years in a number of significant markets,” Humm said. “Moreover, our spectrum holdings will not allow us to launch [Long Term Evolution]. ” No independent future?

AT&T Giving Up on T-Mobile USA Bid?

On November 23, 2011, AT&T and Deutsche Telekom withdrew their applications to combine spectrum owned by both companies, something that would be required if AT&T were to succeed in acquiring T-Mobile USA.

AT&T also says it will take a pretax accounting charge of $4 billion ($3 billion cash and $1 billion book value of spectrum) in the 4^th quarter of 2011 to reflect the potential break up fees due Deutsche Telekom in the event the transaction does not receive regulatory approval.

AT&T says it still is pursuing the deal, but the taking of the charge and withdrawal of applications indicate, at the very least, that AT&T thinks prospects are dimming, if not a definitive recognition that the bid will fail.  AT&T Throwing in Towel on T-Mobile USA?


Given the fact that the accounting charge will be taken in advance of the time the Department of Justice antitrust hearing would occur, some will speculate that AT&T plans to withdraw its bid to buy T-Mobile USA before the hearing. 


It is starting to look as though AT&T is preparing to abandon its acquisition attempt. 

T-Mobile USA Reports Third Quarter Subscriber Gains

Mobile share will shift, based on mergers

T-Mobile USA reported third quarter 2011 service revenues of $4.67 billion, slightly down from $4.71 billion in the third quarter of 2010, but net customer additions of 126,000 in the third quarter of 2011, a 176,000 improvement from net customer losses in the second quarter of 2011 of 50,000 and slightly down from 137,000 net customer additions in the third quarter of 2010. T-Mobile Gains Subs

Given the distractions of the still-unsettled acquisition of the company by AT&T, that is a reasonable performance. T-Mobile USA attributed the gains to its smart phone offers, value pricing, a wider selection of 4G devices and the 4G network itself.

T-Mobile USA served 33.7 million customers at the end of third quarter of 2011, compared to 33.6 million customers at the end of second quarter 2011 and 33.8 million customers at the end of third quarter 2010. 


The gains came from prepaid customer additions of  312,000 in the third quarter of 2011, an improvement from 231,000 net prepaid customer additions in the second quarter of 2011, and 190,000 net prepaid customer additions in the third quarter of 2010.

Post-paid contract customer losses, including connected devices were 186,000 in the third quarter of 2011, an improvement from 281,000 net contract customer losses in the second quarter of 2011. Net contract customer losses were 54,000 in the third quarter of 2010.


Those results point up one key element of T-Mobile USA positioning in the broader mobile market. With AT&T and Verizon Wireless claiming leadership of the "premium" positions, and several firms including Leap Wireless and MetroPCS claiming the "value" positions, both T-Mobile USA and Sprint must fight to figure out where they fit. 


In a sense, both T-Mobile USA and Sprint are being squeezed from the top and the bottom, in terms of their segments in the market. 

Cable Deal for T-Mobile USA?

With the Justice Department having filed suit to block the proposed AT&T purchase of T-Mobile USA, what is T-Mobile's plan if the deal falls through? It doesn't appear that T-Mobile USA actually has had a "plan B." But many speculate that if the AT&T acquisition is blocked, it will also signal that Sprint will not be allowed to buy T-Mobile USA, either.

That will leave T-Mobile USA in a tough position, as it needs spectrum to launch Long Term Evolution, and will emerge from the merger process weakened in the retail market.

Bernstein Research senior analysts Robin Bienenstock and Craig Moffett say the most likely scenario is not a Sprint merger but a spectrum deal with cable operators Comcast and Time Warner, both of which own spectrum T-Mobile USA could use to launch LTE services. The cable operators could monetize their spectrum and provide backhaul services.

To the extent that cable operators sell a wholesale service, they might then use T-Mobile USA rather than Clearwire. That would be more bad news for Clearwire.

Cable Deal Could Be T-Mobile 'Plan B