Thursday, May 1, 2014

These are not "Normal Times" in the U.S. Communications Market

Under normal circumstances, the unusual success T-Mobile US is having, in terms of gaining subscriber market share, would be a very big story. 

In the present context of fundamental reshaping of U.S. communications markets overall, T-Mobile’s notable successes would be almost a footnote, as we are on the cusp of a major reworking of U.S. market structure.

At the same time as Comcast wants to acquire Time Warner Cable, a move that would make Comcast a dominant power in U.S. high speed access markets, AT&T is possibly going to make a move to become a national provider of video services, while Sprint prepares to rearrange the structure of the U.S. mobile market.

And other megadeals are surely coming. At the same time, the Federal Communications is trying to finalize, once and for all, network neutrality rules that make sense, many would argue.

With all that going on, T-Mobile US operational performance might arguably have less significance.

But T-Mobile’s market share gains are notable.

T-Mobile US net subscriber growth continued in its most-recent quarter, including net additions of 2.4 million, the first quarter that T-Mobile US has added more than two million net additions.

Since launching its marketing assault on the U.S. mobile market, T-Mobile has had four straight quarters where its net additions have topped one million each quarter.

Since the U.S. mobile market is largely saturated, the obvious question is where those customers are coming from, even if some are tablet accounts, as is sustaining net subscriber growth at the other three national carriers.

In the first quarter of 2014, T-Mobile had 67,000 “mobile broadband” (not phones) branded postpaid net additions, principally composed of tablets, compared to 69,000 in the fourth quarter of 2013.

Importantly, T-Mobile US added 1.3 million branded postpaid net additions while also cutting its churn rate on postpaid accounts to 1.5 percent.

Revenue was up but earnings dropped 12 percent. And that is the key strategic issue for T-Mobile US. Its strategy requires continued high market share gains to offset the high marketing costs and lower average revenue per account.

Essentially, T-Mobile is trading gross revenue and profit margin to gain market share. As always in such cases, the strategy can work so long as the company can grow its customer base fast enough that the extra customers compensate for lower average revenue per account.

Gross additions were 23 percent higher, quarter-over-quarter, and 136 percent higher, year-over-year. No other national U.S. mobile service provider is adding that percentage of new customers.

But gross revenue also was boosted by the acquired value of MetroPCS customers T=Mobile US gained by acquisition.

Service revenues for the first quarter of 2014 grew by 33.3 percent year-over-year primarily due to the inclusion of MetroPCS results for the full quarter, T-Mobile US says.

Service revenues increased by 3.3 percent quarter-over-quarter, even though T-Mobile US service plans now reflect adoption of plans with lower monthly service charges.

Branded postpaid average revenue per user (ARPU) decreased quarter-over-quarter by $0.69 or 1.4 percent to $50.01, an improvement compared to the quarter-over-quarter decline of 2.9% in the fourth quarter of 2013.

The issue, many would say is how long T-Mobile US can support such rates of subscriber growth.

All of those questions could appear in quite a different context, though, should several major mergers succeed.

Though only the Comcast deal to buy Time Warner Cable has formally been announced, it appears virtually certain that Sprint will make a formal bid to buy T-Mobile US. And it seems likely AT&T will make an offer to buy DirecTV.

That will mean Dish Network also is in play.

With such wholesale potential changes in the U.S. market, T-Mobile US organic growth will be less the story. A fundamental reshaping of U.S. competitive dynamics will emerge as the bigger story.

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