Will T-Mobile “Jump” Over Competitors?

Evan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

T-Mobile US (NYSE: TMUS), the “un-carrier” cell phone company, has just announced an interesting temporary plan to allow qualified customers to buy a new phone with zero money down. This comes after T-Mobile rolled out the new “JUMP” (just upgrade my phone) program, which supposedly gives customers more flexibility in trading in their old phone for a new phone.

Will T-Mobile’s unorthodox tactics make the company “JUMP” over its competitors and reap rewards for investors? Generally, while market trends do seem to indicate the possibility that number four T-Mobile might jump over number three Sprint (NYSE: S) in the short term, T-Mobile does have a long way to go in denting the armor of the top two telecom giants, Verizon (NYSE: VZ) and AT&T (NYSE: T).

Cost comparisons are on T-Mobile’s side

Arguably, T-Mobile’s new “zero-money” down proposal won’t have a large impact in the big picture perspective. After all, T-Mobile is running this program as a limited time summer promotional to try and lure customers away from AT&T, Verizon, and Sprint. What the company is trying to accomplish with this proposal is to make customers of other carriers rethink their current phone contracts and continue to sign on to T-Mobile beyond the time the “zero-down” attention grabber deal is over.

In a cost comparison analysis between T-Mobile and AT&T, Sascha Segan of PC Magazine makes this observation:

Costs on T-Mobile will always come out much lower than AT&T because T-Mobile's unlimited plan costs $40 per month less than AT&T's competing 4GB Mobile Share plan. That adds up to $480 per year; while AT&T charges less for devices, the plan difference more than wipes out AT&T's device discounts.

T-Mobile’s appeal is largely based on its “simple math” and seeming ease as opposed to Verizon and AT&T. With T-Mobile’s recent acquisition of the then fifth-ranked MetroPCS, T-Mobile has broadened its customer base and so far, seems to be appealing to some Verizon, AT&T, and Sprint patrons. The cold hard statistics proving this assertion, however, are yet to be released since T-Mobile’s new programs were rolled out only this month. Only time will tell if T-Mobile’s strategies will actually produce results. Shares of T-Mobile have been on a good run recently, though, climbing 46% since May 1, 2013:

<img alt="" src="http://media.ycharts.com/charts/17dad0b0aa798ad150343f348dc7cf2c.png" />

TMUS data by YCharts

Why T-Mobile might become number three

Sprint is fresh off of selling more than two-thirds of its company to SoftBank of Japan and acquisition of broadband provider Clearwire. Sprint is hoping that this revamped “New Sprint” will help it compete better with rivals AT&T and Verizon Wireless.

While Sprint does hold a nice position as the number three cell phone carrier in the United States, the company is currently in a transition period and will most likely struggle with organic subscriber growth in the near-term due to AT&T and Verizon grabbing new subscribers and a resurgent T-Mobile.

T-Mobile is doing better than Sprint in the 4G market. T-Mobile’s 4G routes cover 157 million people and are available in 116 metropolitan markets, while Sprint’s 4G network is available in 110 markets and covers 55 million people.

Yes, indicators and numbers do seem to show that the upcoming quarterly results for Sprint might get very ugly, and Sprint is facing multiple threats on several fronts. But projecting beyond a quarterly basis, Sprint has a mountain of cash that it is sitting on and finally has the resources necessary to battle with AT&T and Verizon. As I will show later on, T-Mobile’s surge is being overplayed at the moment. The next couple quarters might get rough for Sprint due to potential losses in market share and the company’s expenditure in upgrading its networks. T-Mobile might potentially upend Sprint as the number three carrier in the United States for a short period of time.

Sprint can make a comeback depending on how it attempts to take on the “big kahuna” market giants of AT&T and Verizon. At this time, it seems that Sprint investors can either “go big” and patiently wait out the upcoming storm or “go home” by selling their Sprint position and booking any profits before the potentially rocky seas ahead.

Why AT&T and Verizon will stay as the top two

Much has been written about how T-Mobile’s new plans are a godsend and will rocket the company forward. Regardless of the legitimacy of these hyperbolic statements, an examination of some key statistics can shed some light on the prospects of the big players in the cell phone industry.

In the first quarter of 2013, AT&T did see its revenue slightly fall 1.5% to $31.4 billion, while Verizon opened up 2013 with a strong start. Compare the AT&T statistic with T-Mobile’s first quarter 2013 decline of 7% from $5.03 billion for the year-ago quarter to $4.68 billion. Basically, AT&T raked in almost seven times more revenue than T-Mobile did in the first quarter of 2013.

An even more staggering statistic is that as of Q1 2013, AT&T and Verizon jointly controlled about 65% of the cell phone market in the United States, with Sprint clinging on to 12% and T-Mobile controlling 9%. In fact, T-Mobile was the only cell phone carrier to see a decline in market share in the first quarter of 2013.

Although these numbers are only from the first quarter of 2013 before T-Mobile announced these new initiatives, an overall premise can be established. T-Mobile’s “un-carrier” marketing strategy has pulled the company “into the black,” but has not as of yet even scratched the surface against Sprint, AT&T, and Verizon. T-Mobile has a formidable road ahead if it wants to pass up AT&T and Verizon. This is simply looking at the situation from a revenue-generative perspective -- all of this is not to mention AT&T, Verizon, and Sprint’s responses to T-Mobile’s JUMP and zero-down plans.

AT&T and Verizon are well-established companies who have consistently churned out fairly good results. T-Mobile, on the other hand, is a relatively new player trying to jump in and disrupt the industry. Yes, some AT&T and Verizon users might switch to T-Mobile, but more new consumers will most likely offset these losses.

The bottom line

While T-Mobile’s new strategies are interesting and might snap up some market share, the numbers so far seem to suggest that T-Mobile has a long way to go before truly giving Verizon and AT&T a run for their money. Sprint’s reorganizing (and a possible misstep) might give T-Mobile a boost to the number three spot. Investors who bought T-Mobile stock on May 1, 2013, have seen their initial investment appreciate almost 50%. Investor confidence and optimism (some warranted and some not warranted) should propel T-Mobile stock higher in the upcoming months. Whether T-Mobile can JUMP over Sprint remains to be seen and is likely, but Verizon and AT&T will hold on to their spots for the foreseeable future.

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