T-Mobile's "Uncarrier" promotions may be winning the fourth largest nationwide wireless operator new customers, but it's coming at a cost.
For the fourth quarter of 2013, the company's losses grew to $20 million, or 3 cents per share. This was up from a loss of $8 million, or 1 cent per share, during the same quarter in 2012. The losses were primarily a result of the company's higher spending on promotions.
Revenue increased by 39 percent year over year to $6.83 billion.
The company said last month that it added a total of 1.6 million customers in the fourth quarter. That compares with 1.02 million additions in the third quarter. It has added a total of 4.4 million customers for the year; 2 million of them were on its postpaid service. In the fourth quarter a year earlier, T-Mobile lost 515,000 customers. In total, T-Mobile ended the fourth quarter of 2013 with 46.7 million customers.
About 869,000 new customers in the quarter were "branded postpaid" additions. Another 112,000 were "branded prepaid" customers. T-Mobile also reported that it has reduced its churn rate, or the rate at which customers leave its service to 1.7 percent for the quarter. Compared with the third quarter, the churn rate has remained relatively stable, but it is a huge improvement from the fourth of quarter of 2012 when the churn rate was 2.5 percent.
T-Mobile CEO John Legere, who has been on the job for about a year and a half, said the strong subscriber growth shows that the company's strategy is working.
"Customers are fed up with the old ways and are voting in favor of choice, innovation and doing business with a company that cares about them and is willing to earn their business," he said in a statement. "For shareholders, we transformed the company into a fierce, growing competitor that is changing the wireless industry and creating significant value."
The cost of 'Uncarrier'
T-Mobile's subscriber growth comes in large part due to the company's new Uncarrier strategy, which has resulted in T-Mobile getting rid of service contracts and phone subsidies, adding a new upgrade program, offering free international data roaming, and giving away 200MB of free data for tablet customers. Earlier this year, the company announced it would pay early termination fees for customers switching to T-Mobile from any of the other three major US wireless operators.
But T-Mobile's aggressive tactics to win new customers is costing the company. Even though revenue was on the rise due to the fact that T-Mobile is now servicing more customers, the average revenue per user, or ARPU, dropped from the third quarter to the fourth quarter. T-Mobile reports that postpaid customers in the fourth quarter spent $1.50 less than they did the previous quarter. This is a drop of 2.9 percent for an average spend of about $50.70 each month.
The main reason for this decrease in average revenue per user is because customers are moving to T-Mobile's lower cost Value and Simple Choice plans, which cost less compared to the older, traditional service contract plans, which bundled equipment and service plans. On the prepaid side, the average customer spend per month increased slightly by 13 cents or 0.4 percent to $35.84 compared to the third quarter of 2013.
But T-Mobile's chief financial officer Braxton Carter said during an interview that the heavy losses in the quarter were mostly attributable to the cost of acquiring new customers. According to T-Mobile, the cost of adding a new subscriber increased by $10 to $317. The company attributed this increase to promotional expenditures during the holiday season as well as higher equipment losses from an increase in sales of higher priced smartphones.
"This is a business where you have to pay to acquire customers," Carter said. Indeed, T-Mobile went from losing hundreds of thousands of customers in 2012 to a gaining 4.4 million customers in 2013.
"If we had acquired only 2 million customers during the year, our profitability would have significantly improved," he added. "It was the significant acceleration of growth in subscribers that has burdened the cost of the business."
But he said the cost of acquiring these customers in 2013 will pay off over the next five years. T-Mobile has significantly improved customer retention. And even though customers may be generating less revenue per month on average than they did under the company's previous contract plans, T-Mobile still comes out ahead because it has more customers on the network. What's more, Carter pointed out that T-Mobile has improved how much it spends to support existing customers.
"We are getting more efficient, which will also drive profitability," he added.
Keeping Uncarrier alive
T-Mobile has said that it is determined to continue to move forward with its Uncarrier strategy. Legere says he isn't done shaking up the industry. And the company stated in its press release that it expects to add between 2 million and 3 million new postpaid customers in 2014. And the company also believes that by the end of 2014, roughly 85 percent to 90 percent of its postpaid customers will be on its new Value/Simple Choice plans.
T-Mobile's efforts have indeed shaken things up. Its competitors -- AT&T, Verizon Wireless, and Sprint-- have each responded with competing offers. AT&T, which has been the most targeted by T-Mobile in its marketing, has responded the most aggressively. To better match T-Mobile's offers, AT&T has also unbundled the cost of new devices from its service plans. What this means is that customers who buy their own phone or who bring a used phone to the AT&T network, get a discount on their monthly service. The company has also responded with a revamped pricing schedule that provides more value for customers.
Even Verizon has begun responding to T-Mobile's market shakeup. Big Red is now offering customers more data for the same price. It's also added a lower cost tier of data service and it revamped its early upgrade program.
T-Mobile's efforts have also not gone unnoticed by regulators, who now are much less likely to allow competitor Sprint to acquire T-Mobile. As a result, it looks like T-Mobile will continue to forge ahead alone in its strategy. But the big question is whether it will be able to survive as its aggressive moves continue to take a toll on the bottom line.
The company is hosting a conference call to discuss results at 6 a.m PT today.
Updated 9:05 am PT: This story has been updated with comments from a T-Mobile executive.