T-Mobile USA faces a daunting uphill climb as it looks to turn itself around.
The nation's fourth-largest wireless provider, two months removed from a failed attempt to merge with AT&T, today laid out its comeback plan, which includes improving its existing network and deploying 4G LTE by 2013. Parent Deutsche Telekom has committed to investing $4 billion in the business, and signaled a willingness to explore other options, which could include an initial public offering or the sale of assets.
That T-Mobile is investing in its network and getting serious again about winning back customers is positive for a business that remained stagnant last year amid a looming takeover. But its challenges are legion. The carrier's fourth-quarter results saw the carrier take another step back, which CEO Philipp Humm blamed on the introduction of the iPhone 4S. Some also question the company's ability to remain competitive given its relatively weak spectrum position and investment.
"Even with the new LTE strategy, there are significant challenges ahead," said Jan Dawson, an analyst at research firm Ovum. "T-Mobile will be late to the LTE party, and its coverage will lag its major competitors for some time."
T-Mobile is once again embracing its upstart challenger role in the industry because it has little other choice. More than at any point in its history, T-Mobile is on the outside looking in. It's the only national carrier still seeing massive subscriber losses, and is the only one that still lacks the iPhone. Humm said that with the cloud of AT&T cleared away, the company can go back to aggressively going after consumers through price and the strength of its offering.
"The AT&T deal obviously had a negative impact," Humm said in an interview. "It's a good chance to reinvigorate our brand."
Bringing T-Mobile back
Humm blamed the uncertainty caused by the AT&T deal for T-Mobile's deteriorating brand, a lower customer service rating, and lost customers. The company also halted projects while the merger was being evaluated that are now in the process of getting spun up again.
Yet T-Mobile needs to send a thank you note to AT&T for its renewed aggressive posture. The carrier extracted a generous breakup fee--which included $3 billion in cash and a roaming agreement worth another $1 billion--from AT&T after their deal collapsed.
The cash infusion has helped convince parent Deutsche Telekom--which previously expressed reluctance at investing in the U.S. business--to pour money into network improvements that are critical for keeping T-Mobile competitive even as larger rivals Verizon Wireless and AT&T race to roll out their own 4G LTE network.
The network improvements include using more modern equipment in its network infrastructure, moving its spectrum more in line with the two major carriers and carriers around the world. Chief Technology Officer Neville Ray said the switch to different spectrum would make its network compatible with more devices, including the iPhone.
The improvements will include placing LTE Advanced hardware in its network during the deployment, allowing it to make an easy transition to the next evolution of 4G LTE when more devices are available, Ray said.
T-Mobile plans to use existing spectrum already dedicated to its 2G and 3G networks and rededicate it to 4G LTE, a practice known as re-farming. The network will also be augmented by the roaming agreements from AT&T.
This year, Humm said he expects to reduce the turnover rate for its contract customers, while its prepaid customer base should continue to see good growth. He acknowledged that customer growth will continue to face challenges over the next two years, which he considers a rebuilding period. But the moves made now will pay off by 2014 and beyond, he said.
The company also hopes to improve its wholesale business by encouraging resellers to jump on its network. Humm said AT&T again had hurt its ability to sign new business last year, but he expects that will be a big contributor down the line. T-Mobile is looking to launch a platform to make it easier for resellers to jump on to its network, and also plans to offer more aggressive rates.
Critics, however, say the $4 billion figure isn't enough to keep pace with Verizon and AT&T, which are pouring significantly more into their network deployment. While the other wireless carriers are planning to roll out their next-generation service throughout much of their territory, T-Mobile can't afford to be so widespread in its deployment.
T-Mobile plans to cover the top 50 markets with 4G LTE by the end of 2013. But in 25 of those markets, the carrier will only be able to offer a limited amount of spectrum. The company has few sources for an immediate infusion of badly needed spectrum, which is required to quickly ferry data and voice traffic over the air.
Another challenge will be in the confusion brought on by its own definition of 4G. Since 2010, T-Mobile renamed its HSPA+ network--widely considered a 3G technology--its 4G network. With the widespread availability of HSPA+, T-Mobile was able to boast of having the nation's largest 4G network.
Verizon reacted by campaigning around the 4G LTE moniker to differentiate itself. The flood of marketing has been somewhat effective in distinguishing 4G LTE as a higher-end service--even if many don't really understand--or care--that it stands for another technology called Long-Term Evolution.
Humm said he doesn't expect to jump on the 4G LTE brand even when T-Mobile moves to that technology. The company will likely stick to the 4G name for its service, and that devices will move back and forth between the networks without the customers' knowledge.
The issue for T-Mobile is that it will be woefully behind on its LTE deployment by the time it gets started. Verizon has worked at a relentless pace to get its network rolled out, while AT&T is steadily rolling out its own network. Sprint Nextel said its first few markets will launch by the first half of this year. They are all expected to have a majority of their rollout completed by 2013. At that point, LTE will just be another standard feature, as opposed to the premium selling point it is now.
T-Mobile's other major challenge continues to be the iPhone. The company lost a total of 802,000 customers in the final quarter of 2011, a huge drop from the 251,000 who jumped ship in the prior year's quarter. While Humm expects improvement, a return to growth on the contract side remains far from certain.
Humm declined to comment on any potential deal with Apple, but reiterated that he would like to get the iPhone under the right terms. He noted, however, that the other carriers all took a hit in their margins as a result of the cost of carrying the iPhone. For now, the company is planning to focus on offering a better lineup of Android and Windows Phone devices. For instance, it is currently pushing its budget-friendly Nokia Lumia 710 and the Samsung Blaze 4G.
While the iPhone does come at a considerable cost, the other carrier executives have all said that the subscriber growth that comes from the device makes it worth the near-term pain.
Open to options
T-Mobile, fortunately, has a lot of options available.
The company could sell off some of its cellular tower assets to raise funds, tap the public market, or be spun out of Deutsche Telekom as an initial public offering. Humm, however, declined to comment on any of these specific scenarios.
T-Mobile could also align itself with Dish Network in some form. Dish, which is sitting on a valuable stash of spectrum itself, could augment T-Mobile's position through a partnership. CNET reported that Dish would be willing to seek a deal if it couldn't get an immediate Federal Communications Commission waiver to use its spectrum for a wireless network. AT&T, however, is also looking for a deal with Dish too.
T-Mobile is a far different company than it was through most of 2011, when it was tethered to AT&T. Now, the company and CEO Humm hasn't been afraid to irk its rivals. T-Mobile yesterday asked the FCC to block Verizon's bid to acquire spectrum from the cable providers--spectrum T-Mobile may have its eye on as well.
Now, T-Mobile can dictate its own fate. Whether those options can spark a turnaround remains to be seen.