T-Mobile's Price War With AT&T Is Actually Not Great News for Customers

By Andre Mouton  JAN 22, 2014 2:45 PM

As the nation's budget carrier, T-Mobile's best bet is to cut costs wherever it can -- not waste its capital and its margins in a spat with much larger competitors.

 


I received a letter from AT&T Inc. (NYSE:T) the other week. It was all boilerplate, and I spent about as much time reading it as John Dwyer, Senior Vice President spent signing it. However, there was an interesting bit towards the end: "We will continue to work hard each day so that we earn – and keep – your business as a valued customer."
 
These days, the "keeping" is the hard part. The major cellular providers are losing subscribers to T-Mobile US Inc. (NYSE:TMUS). By eliminating two-year contracts and phone subsidies, the "uncarrier" was able to add more than 4 million customers to its rolls last year. In December, AT&T fired back with some off-contract, subsidy-free plans of its own; and earlier this month it offered to cover the costs of switching for any T-Mobile subscribers who returned to AT&T. T-Mobile CEO John Legere called the move “desperate,” and in retaliation, he was kicked out of AT&T’s CES after-party.
 
How could anyone not enjoy this soap opera? Cellular providers have done little to win their customers’ love, and polls regularly give the industry low marks for customer satisfaction. Personally, I feel nothing but schadenfreude for a company that slaps me with $15 fees any time I run over my data limit – by a few kilobytes, on the last day of the billing cycle. Or one that muscles its customers into a $20/month text messaging plan, by eliminating every other option. Or that sends me a letter, damp with crocodile tears, several months before my contract is up.
 
That being said, I probably won’t switch. I’m less optimistic about T-Mobile’s future than Legere, who recently argued that, “We are either going to take over this whole industry, or these bastards will change and we’ll still be wildly successful.” Fact is, the uncarrier is unprofitable. It lost money in three of the last four quarters, and has a weak balance sheet to boot; the only reason T-Mobile could afford this month’s purchase of wireless spectrum from Verizon Wireless was because it turned to debt markets and diluted its stock last fall.
 
The price war with AT&T only makes matters worse. T-Mobile is now promising to cover up to $650 in early termination fees for anyone who converts, and this subsidy must be paid for – somehow. T-Mobile CFO Braxton Carter told CNET that while his company would “suffer a hit in the short term, it would make up for it and turn a profit over the long term.” He may be correct, assuming two things: that the short term isn’t a bullet to the head, and that customers aren’t smart enough to realize that they can get a new phone several months later by switching back to AT&T and taking advantage of its $450 offer.
 
Customers should be as concerned as investors. T-Mobile is still in the process of rolling out its LTE network, and there’s a downside to being the nation’s fastest growing provider: You tend to have the nation’s fastest growing traffic. If I go to the trouble of switching carriers, I want to know that my cell service will improve – or at least, get no worse. That only happens if more cell towers get built.
 
At the moment, T-Mobile is struggling just to maintain its existing equipment. In the third quarter, the company’s net capital expenditure (or capital expenditure after depreciation and amortization) was $30 million, versus $240 million for Sprint Corporation (NYSE:S), $400 million for the wireless unit at Verizon Communications Inc. (NYSE:VZ), and $1.2 billion for AT&T’s mobile business. Previous quarters weren’t so bad, but with depreciation rising and profitability falling, future quarters are liable to look even worse.
 
The spectrum purchase was a mistake, but the bullfight with AT&T could be fatal. As the nation’s budget carrier, T-Mobile’s best bet is to cut costs wherever it can – not waste its capital and its margins in a spat with much larger competitors. Unfortunately, John Legere not only swears like a sailor, he spends like one, too.

See also:

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AT&T Is Out for T-Mobile's Blood


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