Analysts: T-Mobile's new 10 GB family plan promotion will pressure capacity, speed up M&A

T-Mobile US' (NYSE:TMUS) new family plan promotion will likely put more pressure on its network capacity and speed up the timeframe for when it needs to make a deal with another company, according to financial analysts.

In a research note, New Street Research analysts Jonathan Chaplin, Spencer Kurn and Vivek Stalam note that the new promotion, which offers each customer unlimited voice, texting and 10 GB of data, and includes a monthly price of $100 for two lines and costs $20 more per line, will likely help T-Mobile attract subscribers while boosting average revenue per user and EBITDA.

However, "longer-term, TMUS will eat through their available capacity at an even faster rate, hastening the need for a deal with someone who can bring more capacity," they added. The analysts can foresee T-Mobile striking a deal with Dish Network (NASDAQ: DISH), which was widely rumored last month, though they also point to Comcast (NASDAQ: CMCSA) and Sprint (NYSE: S) as potential future partners.

They note that under the new promotion, T-Mobile's per GB of data has fallen by 70-75 percent on mid-tier and high-tier data offerings for three lines. T-Mobile also said customers can add a fourth line for free when they sign up or switch to the new plan from now through Labor Day, which is Sept. 7. T-Mobile said a family of four can get 10 GB of LTE for each person for just $120 per month under that offer.

The promotion for the fourth line replaces T-Mobile's previous promotion of 10 GB on four lines for $100, at 2.5 GB of data per line. The carrier is now giving customers a total of 40 GB across four lines for $120.

"TMUS's new 4-for-$120 promotional offering gives customers 4x the data that T or VZ offer and 2x the data that Sprint offers," the analysts wrote. "Moreover, TMUS's plan is cheaper than the incumbents' offers, and only a slight premium to Sprint's offer."

The New Street analysts think that T-Mobile's effective price cut was likely driven by Verizon Wireless (NYSE: VZ) and perhaps Sprint (NYSE: S) "seeing some success with their own promotions."

"We think the plans are smart because they are extremely compelling (a 70- 75% reduction in the price per GB is no joke) and the other three carriers will have a hard time responding given their capacity constraints (even Sprint is constrained until they get 2.5 GHz more broadly deployed)," they added.

However, while T-Mobile "can support the increase in consumption in the near-term" it will also "accelerate their need for more capacity," according to New Street.

"The move would make less sense if TMUS were going to be a standalone company forever; however, with a deal with one of DISH, Comcast or Sprint likely, it makes all the sense in the world," the analysts added. "All three would bring tremendous additional capacity (DISH and Sprint bring spectrum; Comcast brings a path to affordable network densification)."  

More broadly, analysts at Macquarie Research say that all of the major U.S. carriers are going to face serious LTE data constraints on their networks in the next three years. They forecast that LTE data traffic on the four Tier 1 carriers' networks will rise from an estimated 903 petabytes of traffic per month in 2015 to 3,693 petabytes per month by 2018.

That will come about through "a combination of network densification, improved equipment throughput and spectrum refarming efforts," the analysts wrote in a research note.

"In 2017 and 2018, we also assume that AWS-3 spectrum is deployed commercially," they added. "Even with this >50% annual capacity growth, we do not believe that LTE networks will be able to keep up with LTE usage growth by 2018. Our analysis also assumes that 4K TV for mobile remains a niche standard with just 6% of mobile video traffic on 4K in 2018." 

The Macquarie analysts added: "Our conclusions are that carriers will have to develop Wi-Fi offload capabilities and utilize unlicensed spectrum and small cells in order to cope with the taxing capacity demands of mobile video. At the same time, video content providers may need to subsidize the upgrade of mobile video infrastructure, or else a degraded consumer experience may inhibit mobile video adoption."  

Related articles:
T-Mobile launches new family plan with 10 GB of data, but drops existing unlimited promotion
T-Mobile plans 'big, bold and cool' new pricing plan for this week
Analysts: T-Mobile's strong Q2 subscriber numbers likely to boost revenue, crimp earnings and margins
T-Mobile seeks to pre-empt AT&T's international expansion with free roaming to Mexico, Canada
Dish's Ergen tells DBJ: 'We're not feeling any pressure' to make a deal
Reports: Dish looking for $10-15B in financing for T-Mobile bid