T-Mobile Keeps Pressure on Peers with HTC One S Launch
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
It’s hard competing against titans such as AT&T (NYSE: T), Verizon (NYSE: VZ) and Sprint Nextel (NYSE: S). With an only slightly noticeable ad campaign, T-Mobile – a subsidiary of Deutsche Telekom, seems to be making arguments against the use of subsidies. Cole Brodman, T-Mobile’s chief Marketing Officer, claims that subsidies, which allow popular phones such as the iPhone 4S or Galaxy S II to sell for $200, are actually hurting the industry by artificially devaluing the hardware that's present in the market.
Strange, then, that T-Mobile, along with everyone else (AT&T and Verizon included) still relies heavily on subsidies to drive customer growth. While I don’t think this recent announcement will have much impact one way or another, I do see other recent events will succeed in generating a great boost to Verizon's business.
Before the Pink Dress
T-Mobile was actually a European phenomenon before hitting the states. Based in Bonn, Germany, the company began in 1989 as Deutsche Bundespost Telekom, later becoming Deutsche Telekom in 1995. When DT consolidated its international operations in 2002, which at that time spanned from Hungary, Netherlands, Poland, and the UK, it settled on the now well-known name of T-Mobile.
In the U.S., it is the 4th largest carrier behind the previously mentioned giants. Globally, T-Mobile has a combined total of approximately 150 million subscribers, making T-Mobile International the world's tenth-largest mobile-phone service provider by subscribers and the third-largest multinational.
T-Mobile came to the U.S. in 2002 and quickly grew to its current size of 34 million customers and a sizeable annual revenue of $21 billion. DT had plans to accept AT&T’s $39 billion offer to purchase T-Mobile, but the buyout was blocked by the U.S. Department of Justice due to antitrust laws.
In addition to solidifying a stable position in the cellular mobile network market, T-Mobile also operates a nationwide Wi-Fi Internet-access network. The T-Mobile HotSpots network has strategically picked up support from thousands of Wi-Fi access points installed in businesses, hotels and airports. This maneuver made it a viable option to Verizon’s attempt to offer the same service.
With such growth, it makes one wonder why the complaints? With such recent bad press from its rivals, particularly AT&T, why would it waste its much needed advertising space to moan about subsidies – that it in fact uses?
AT&T is still slogged in trying to comeback from its customer complaints over purposely slowing the speeds of some connections. This would include customers who had paid for “unlimited data”, who would ‘technically’ still get it, just at dramatically slower speeds.
It also is facing unsettledness among its own ranks. The Communications Workers of America, a powerful union representing over 40,000 AT&T employees, have the company doing everything it can to avoid walkouts from its stores and factories over issues such as pensions and healthcare.
Not only that, Sprint Nextel’s announcement last of providing super-fast speed on its 4G LTE network backfired. As it turned out, the promised speeds could only be reached in Kankakee, IL until further updates could be finalized sometime later in the year. Rather than holding off until a more solid entry could have been implemented, it chose the way of hype announcements and no follow through.
In truth, the key to T-Mobile's alleged woes are not subsidies. Subsidies have become essential for carriers because they allow the carrier to offer a phone that costs much more to manufacture at a reasonable price. They do this through having the 2-year contract pay for any hit they would take on the phone. That's why early-termination fees for smartphones are so high and heavily enforced. Consumers are used to lower prices for expensive phones with great functionality and actually prefer paying a smaller upfront cost even if it costs more paying the monthly bill.
What Will Happen
T-Mobile will continue to ride on its already solid performance. This week it plans a launch party of its own variation of the HTC One S. While the official launch will be the following week, it is suspected that the price will be around $200 in order to stay competitive with Sprint Nextel's upcoming HTC Evo 4G LTE. The HTC One S is the long-awaited smartphone that will run the Android 4.0 Ice Cream Sandwich OS.
This product, which will cleverly roll in compatibility with T-Mobile’s hot spots, combined with its global position and partnerships will most certainly result in a revenue increase and stock jump. But don’t count out its competitors just yet.
As stated, Sprint Nextel has its own toy coming out shortly that is expected to turn heads. AT&T also has a solid partnership with Apple (NASDAQ: AAPL) and is also rolling out a device with Google’s Ice Cream Sandwich. These companies are still competitive, especially in subscriber growth. AT&T recently issued a statement that its data traffic is doubling on its network every year, with an astonishing growth number of almost 20,000 percent for the past five years.
But this is no comparison to Verizon’s master plan. Last year, it began offering Apple’s iPhone on its networks. That move alone saw new subscribers jump by more than 2 million in two quarters. By 4Q, Verizon had sold 4.2 million iPhones, more than double that of AT&T’s sales and a mere gain of 800,000 new customers.
Not only that, Verizon is a competitor not only in wireless, but landlines and broadband services as well. With a healthy lead over both AT&T and Sprint Nextel in these areas, its operating costs are also promising. It’s gross margin is currently at 58.63%, compared with AT&T at 54.73% and Sprint Nextel at 43.54%.
T-Mobile has nothing to worry about and is a great company for investors to look at. Investors in AT&T are going to feel pressure but should expect good returns along with Sprint Nextel after new product rollouts. Verizon is a strong performer and will certainly benefit as more innovative phones spread through its service.
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