T-Mobile US (TMUS) has been doing well on the consumer side over the last year or two. Now they are getting ready to enter the business market. To attract business attention, they will have to lower prices just as they have on the consumer side.
That said, is T-Mobile hurting the wireless industry?
German company Deutsche Telekom AG ($DTE:DE) is two-thirds owner of T-Mobile. DT CEO Timotheus Hottges expressed a disturbing opinion a couple months ago. He said the T-Mobile approach is not sustainable. I think many agree the T-Mobile approach seems to be non-sustainable, but the bigger question is, could it cause problems for the financial health and growth of the entire wireless industry?
It’s bad enough if one company is willing to risk it all. It's quite another if this starts to affect other competitors, and erode the financial picture and long-term viability of an entire industry. One thing we seldom think about is just how large and far reaching the wireless industry really is, and how important this key industry is for the US economy, going forward.
Remember, every coin has two sides. So, it’s important to take a longer-term look at what T-Mobile is doing so far on the consumer side, what they intend to do on the business side, and what effect it will have on the wireless marketplace in the USA. T-Mobile is a small competitor. Generally speaking, it has to charge less to attract customers, because it has a smaller network and slower speeds - that’s the growth path they have been on during the last year or two. The wireless marketplace is split into different segments, like a pie is cut into different slices. T-Mobile is targeting customers who need low cost and are willing to give up things like network reach, speed and so on, in many locations.
On this basis, T-Mobile works...as long as customers know they are getting what they pay for. This is the way a competitive industry operates, which is fine. However, many T-Mobile customers don’t understand this trade-off.
Every Coin Has Two Sides
Like everyone else, as a consumer, I too am happy with falling prices from the short-term consumer point of view. I mean, who doesn’t like to save money? However as a wireless analyst, I understand that companies need to be profitable in order to continue to grow and improve. And if the wireless industry has reduced earnings, their ability to invest in their networks is negatviely affected, eventually hurting the entire industry.
Wireless Carriers Invest Billions of Dollars Every Year
Most people don’t realize how much money companies like AT&T Mobility (T) , Verizon Wireless (VZ) , Sprint Corp. (S) and T-Mobile have invested to continually upgrade their networks. Each of those companies invests billions of dollars every year - an incredible investment for the future.
This investment impacts not only these wireless carriers, but countless other companies that they do business with as well. Wireless carriers don’t just stick it in the bank and forget about it. They invest it. This investment is helpful to the US economy. Rapid growth in wireless powers the entire industry. That means networks, handset makers and investors, and it also means workers, and the partners and companies they purchase supplies, equipment, hardware and software from.
So, this profitability and continual expansion represents a huge growth engine, which reaches out in far and distant ways to fuel other companies and segments. All that said, profitability in the wireless industry is key to this investment and this strong part of the economy.
Wireless is the Center of the Universe
I believe the wireless industry is the center of this universe going forward. They are the industry that is helping other industries modernize in new ways like healthcare, automotive, retail, and many others. Just look at all the features available to drivers or patients, as an example. This improves the customer or patient experience, and we are just in the very early stages of this new revolution. Continued growth still requires sizable investments - in the range of billions every year, per carrier.
So, keeping the wireless industry strong, growing and getting better costs a lot of money. That’s why carriers need profits to keep innovation high, and to do that, they need to be profitable. I want to see the largest four competitors continue to do strong business and show growth. I would also love to see smaller competitors like United States Cellular Corp. (USM) , C Spire, Tracfone and many other smaller competitors grow stronger as well.
Growth could be impacted if the industry is not able to continue to invest. As an example, just think about the Apple, Inc. (AAPL) iPhone, Google Inc. (GOOG) Android and Samsung Galaxy. Think about all the extra capacity and features the handset makers and the networks have created in just a few short years.
This is what is at stake. Lower profits mean less to invest, which means less innovation, less capacity and less growth. Also, new players are entering the space all the time. Consider Google, which will enter the wireless wars shortly as an MVNO. What impact will Google have on the industry? I don’t know yet, either, but this is another change agent in this industry.
Google has entered the ultra-fast gigabit Internet space. They have entered the wireless handset space with their Android software and their own hardware as well. Now they want to take a step into wireless services. What impact will Google have going forward?
How Successful will T-Mobile Be on the Business Side?
T-Mobile over the last year or two has shown growth on the consumer side by cutting prices. Now they want to expand to business by cutting prices as well.
Consumers realize the trade off. In order to save money by using T-Mobile, they may have to deal with slower speeds and less network coverage in many locations. Now, T-Mobile says they will enter the business space. Business customers must realize the same limitations. If they do, at least any problems will be understood before they start. Today, AT&T and Verizon have almost all the customers in this space. There are other choices, but most business customers have chosen these two for a variety of reasons including network reach, speed and quality.
There is a reason for this. The next question is, will T-Mobile be successful on the business side? To answer that question, think of the marketplace like a pie with slices.
I think the vast majority of business customers will remain with AT&T and Verizon for one simple reason - a company must make sure all their workers have access to the network, and fast speeds wherever they go. They do this so they can sell and serve customers well.
Remember, a wireless phone is no better than a paperweight if the service is not there. Cutting costs is great, but not if it impacts the ability to serve customers well. So I think T-Mobile will likely see some success on the business side with a limited number of small businesses. Typically, this is when the owner is already a T-Mobile customer and likes them in a particular area.
I think the larger and wider spread a company is, the less likely they will be interested in switching from an AT&T or Verizon to T-Mobile for all these reasons. As for price cuts…as a customer, I thank the industry for cutting my costs. However, as an industry analyst, I believe we need to be very careful about going down this cost-cutting path if we intend to continue to innovate and transform other industries over the next several years.
Have we really thought this through?
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