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Another Legion of Boom: T-Mobile cracking the mobile industry

The Exchange
T-Mobile CEO John Legere speaks during a news conference at the 2014 International Consumer Electronics Show (CES) in Las Vegas, Nevada, January 8, 2014. REUTERS/Steve Marcus

The second-best quarterback at Sunday’s Super Bowl after Seattle’s Russell Wilson just may have been out-of-work passer Tim Tebow.

Tebow was a sensation pitching the merits of T-Mobile’s “no contract” phone plans during the commercial breaks, while Wilson’s Seahawks crushed Denver QB Peyton Manning, who posted the worst quarterback rating in the big game since 2006.

The real story for investors, of course, is that Seattle-based T-Mobile (TMUS) is starting to do real damage to the rest of the industry, especially #2 carrier AT&T (T). Shares of T-Mobile are up 84% since they started trading last May, while AT&T shares sank 14% over the same period.

T-Mobile CEO John Legere’s most recent gambit, to pay for the early termination fees of up to five family members at a time switching to his company, seems to be doing further harm to AT&T.

That’s clear in the latest price cuts from AT&T, which applied to families on big data plans, as well as evidence uncovered by BTIG analyst Walter Piecyk that AT&T has softened its phone upgrade policy. AT&T’s stated policy says it won’t sell customers new phones at the cheap, subsidized price more than once every 24 months but Piecyk found AT&T offering the low price on upgrades after only 18 months as part of a recent promotion.

A big step backwards

The policy should please Apple (AAPL) CEO Tim Cook, who last week blamed a shortfall in iPhone sales on carriers’ extended upgrade policies. But for AT&T it’s a big step backwards in its effort to gift fewer profits to phone makers.

And AT&T’s new cheaper plans provide big savings for customers who use 10 gigabytes a month of data, at the higher end of the spectrum. Piecyk will save $80 a month on his multi-phone family plan.

“That’s pretty significant yet it stumbles out on a Saturday and apparently AT&T has planned no Super Bowl commercials to promote it,” Piecyk writes. “On the surface it looks like T-Mobile and specifically John Legere has AT&T rattled.”

T-Mobile has already said it gained more than 2 million postpaid customers last year, after losing that many in 2012, including an increase of 869,000 in the fourth quarter. Legere started out the year cutting monthly service fees, adding more frequent phone upgrades and lowering international roaming before ending with the offer to pay termination fees.

After showing weakness earlier in 2013, AT&T managed to pull out a decent fourth quarter, likely aided by an initial round of T-Mobile-inspired price cutting in December. It added 566,000 postpaid subscribers in the fourth quarter and almost 1.8 million for the entire year, still short of Legere's haul.

By at least one critical measure, however, T-Mobile’s campaign has yet to injure AT&T. The bigger carrier said its average revenue per phone user increased almost 4% in the fourth quarter from a year earlier. So T-Mobile may be growing faster, but at least so far the price-cutting war has not destroyed AT&T’s pricing power.

Number 3 carrier Sprint (S) hasn't been so lucky as the price war spreads. The carrier doesn't report its fourth quarter results until February 11, but in the first nine months of the year it lost over 2 million postpaid customers, mostly from its Nextel-branded service. And regulators don't appear inclined to allow its still theoretical bid for T-Mobile to go forward.

In fact, with 54.9 million total subscribers at the end of September, Sprint is in danger of being surpassed by T-Mobile in a few more years if current trends continue. T-Mobile was up to 46.7 million total subscribers by the end of 2013.

Verizon (VZ), the largest U.S. carrier, continues to sail above the battles, seemingly unaffected. It added 4.1 million postpaid accounts last year, including 1.6 million in the fourth quarter, and said average revenue per account rose 7%. And last-minute price cutting to goose holiday sales? Nada.

It seems Legere will have to come up with something more enticing than cheap rates and an out of work NFL quarterback to get under Verizon’s skin.