Yahoo Finance T-Mobile Has No Big Plans to Increase Prices
The U.S. wireless industry is currently experiencing extremely high customer retention rates. T-Mobile (NASDAQ: TMUS) notably saw significant improvement in customer loyalty last quarter while its competitors took a slight step back. Still, nobody's struggling to keep customers.
That presents an opportunity for carriers to raise pricing on customers. Indeed, carriers have moved to offer higher-priced premium data plans for customers throughout the year.
But T-Mobile's management doesn't think increasing average revenue per user is going to be a meaningful growth driver for T-Mobile. The company has continuously guided for relatively flat ARPU over the last couple years, relying on a few key strategies to grow revenue and margins. That plan is unchanged going forward even with the potential for the merger with Sprint (NYSE: S) to decrease competitive intensity.
Image source: T-Mobile.
Still room to scale
T-Mobile CFO Braxton Carter has repeatedly said the company's biggest weakness is its scale. With 75.6 million customers, it has around half the scale of either AT&T (NYSE: T) or Verizon (NYSE: VZ). Adding Sprint's customer base to T-Mobile would immediately bring it up to scale with its two larger competitors.
But T-Mobile would likely argue there's still room to grow its customer base following the merger. Its porting ratio between AT&T and Verizon, which measures how many people join T-Mobile from those carriers compared to those leaving T-Mobile for them, is considerably higher than its porting ratio with Sprint. So T-Mobile has an opportunity to keep taking share from the two wireless giants.
Driving that growth is its distribution footprint. T-Mobile is still opening new storefronts in more rural areas to catch up to the expanding wireless network coverage. Management says its stores currently reach about 260 million people, but its wireless network reaches more than 320 million.
Additionally, T-Mobile's market share in rural markets is still very low -- in the single digits. As it expands its network and distribution footprint, that number should move closer to its penetration in urban markets.
Another area in which T-Mobile is relatively underpenetrated is the enterprise segment. That's a segment dominated by AT&T and Verizon, but T-Mobile is making good progress in taking market share. The improved network should help T-Mobile sell into more enterprises and continue growing share of the extremely valuable market.
Scale is more valuable than price increases
The reason T-Mobile is focusing on scale is because it provides a lot more value for the company than price increases. Scaling the customer base over the last five years has enabled T-Mobile to continually invest in its network, distribution, and sales and provide increased customer value. In turn, those moves allowed it to grow its customer base even further.
Price increases wouldn't have the same impact. While a price increase would provide capital to invest in the company, it would also have a negative impact on T-Mobile's ability to retain customers and attract new ones.
Giving up some gross margin today will pay off with higher operating margins in the future. If you compare the EBITDA margins of AT&T and Verizon to T-Mobile's, it's clear that scale provides significant margin advantages.
Carrier | Q2 2018 EBITDA Margin |
|---|---|
AT&T | 44.1% |
Verizon | 47.8% |
T-Mobile | 30.6% |
Data source: company quarterly reports.
Another wave of growth coming
Another important factor for investors to consider is that T-Mobile could generate another wave of growth by increasing the number of products its customers take.
For example, it can add high-margin revenue by providing service for connected devices like smartwatches. Servicing those devices is generally lower cost, as the marginal increase in cellular usage doesn't compare to the marginal increase in the average bill for the customer. (Consider that streaming music on a smartwatch, for example, simply replaces streaming on a smartphone.)
T-Mobile has also been vocal about its plans to offer in-home broadband over its 5G network in connection with the release of T-Mobile TV, based on its Layer3 TV acquisition last year. It expects to cover 52% of U.S. zip codes with an in-home broadband offering over the next few years. That could be yet another opportunity to increase revenue per customer without increasing the cost of its service for those that simply want wireless service.
T-Mobile has a lot of growth opportunities ahead of it even after it completes its proposed acquisition of Sprint. And continuing to scale its customer base and adding higher-margin products should enable it to show considerable earnings growth for investors for some time.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends T-Mobile US and Verizon Communications. The Motley Fool has a disclosure policy.
