One of the big opportunities for T-Mobile (NASDAQ: TMUS) in its planned merger with Sprint (NYSE: S) is to expand beyond providing just wireless phone service. One adjacent market the company is planning to enter (via the buildout of its 5G network) is the home broadband market. Both AT&T (NYSE: T) and Verizon (NYSE: VZ) are working on home internet services using 5G technology, but T-Mobile is more focused on building a 5G network for mobile.
The merger with Sprint is key to T-Mobile's 5G plans because it will give T-Mobile access to a ton of wireless spectrum that Sprint has been unable to use. Combining T-Mobile and Sprint's spectrum assets to deploy a 5G network will result in a lot of excess capacity to move data over the internet that mobile subscribers won't need. T-Mobile plans to use that excess capacity to offer home broadband service to about half the country.
T-Mobile could provide that service at a relatively low price while still earning a tidy profit. As a result, T-Mobile home broadband has the potential to disrupt some of the current economics of the industry.
Image source: T-Mobile.
The exact opposite of AT&T and Verizon
At an investor conference during the CES trade show, T-Mobile President and COO Mike Sievert told the audience, "Our home broadband strategy is to sell excess capacity fully funded by the mobile strategy. It's almost the exact opposite of AT&T and Verizon."
AT&T and Verizon are investing billions of dollars in technology and network infrastructure to support fixed-wireless broadband. That's a wireless connection to a fixed antenna in the home, which will then disburse the internet connection via conventional home Wi-Fi technology. The earliest iterations of 5G connections are already available in some markets.
But there's a whole lot of additional investment that needs to be made to take that technology and make it a full mobile network. T-Mobile is taking a mobile-first approach.
AT&T and Verizon have good reasons for starting with fixed wireless. Their millimeter wave spectrum assets lend themselves to the product. T-Mobile will run its 5G network on its 600 MHz spectrum and Sprint's 2.5 GHz spectrum. Those bands are much better for transmitting signals long distances.
There are some trade-offs to using lower spectrum bands. T-Mobile's network will have greater latency than AT&T and Verizon's fixed-wireless products. That means the amount of time it takes to transmit data might be greater, which could impact an experience like online gaming. T-Mobile's network also would be more prone to congestion, as it has lower throughput, which could prevent the network from delivering its highest potential speeds.
Average consumers, however, don't care about any of that; they just want Netflix to stream without buffering. T-Mobile's product ought to be able to deliver that. Sievert pointed out that many consumers already use their mobile connection as their home internet connection by using their phone as a hotspot or buying a dedicated Wi-Fi hotspot device. T-Mobile's planned service is practically the same thing.
Since T-Mobile plans to sell broadband service that rides on the back of its mobile network, it can offer home broadband for a relatively low price. Current customers are already taking advantage of T-Mobile's wireless network for home broadband practically for free, and T-Mobile is happy to serve customers that way.
The average internet bill in the U.S. is about $60 per month. There's a good amount of profit margin padding that number for home internet providers. That's because most home internet providers are also pay-TV providers, and they use broadband pricing to subsidize their television business.
Pay-TV companies have felt pressure from cord-cutting and skinny bundles over the last few years, driving down the price consumers are willing to pay for a television package. But the same trend has boosted demand for home broadband, so those companies have focused on maximizing profits from their internet service businesses instead.
T-Mobile's plan could destroy the economics of the home internet business for those traditional players. Likewise, it opens the door for T-Mobile to provide its own pay-TV service by offering a replacement for the home internet plus pay-TV bundle that the typical American household pays for. Relying on its mobile network and its ability to scale means T-Mobile should be able to offer a better service to consumers at a better price. That would make it a serious force to be reckoned with.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.