T-Mobile's turnaround strategy has potential--and problems, too

Phil Goldstein
T-Mobile USA outlined its comprehensive turnaround plan late last week at an investor conference, and based on its new direction I think that T-Mobile can capitalize on a renewed image as a cheaper but high-quality competitor to Verizon Wireless (NYSE:VZ) AT&T Mobility (NYSE:T) and Sprint Nextel (NYSE:S). Additionally, I think it can do this without resorting to a partnership with Clearwire (NASDAQ:CLWR) or LightSquared, though those options do still appear to be on the table. 

T-Mobile is targeting a return to growth this year with $3 billion in additional revenue by 2014. Concurrently, the carrier hopes to reduce churn to 2 percent this year and 1.8 percent in 2012. At the end of the third quarter, T-Mobile's contract churn was 2.4 percent. These are daunting tasks, considering T-Mobile has been losing postpaid subscribers at an alarming clip for such a small carrier.

Philipp Humm, T-Mobile USA's relatively new CEO, said that year-over-year revenue growth hit bottom at the end of 2009, and has since been turning around, thanks in no small part to increased data revenues and higher smartphone penetration. The good news for T-Mobile is that it looks like there's room to grow. The company plans to release 25 HSPA+ devices this year, and with only 39 percent of T-Mobile's customer base using smartphones right now, there's a lot of potential for the carrier to rake in more data revenue. Key to this strategy is the company's focus on pushing more and more smartphones down below $100 at retail. "By doing that we are lowering the average subsidy," Humm said, according to a transcript provided by Deutsche Telekom. "So, lowering the average handset cost, but at the same time also increasing handset distribution."

Even more important than the phones is T-Mobile's network. The carrier now covers 200 million POPs with HSPA+ 21 and with fiber backhaul. The company plans to deploy HSPA+ 42 this year to 140 million POPs and have high-speed fiber backhaul to 87 percent of its sites by the end of the third quarter. As this scales up, T-Mobile CTO Neville Ray said the company will be able to reduce costs substantially. That will matter a great deal as the carrier expands its footprint over the next three years via new base station technology, remote radio heads and new antenna technology at an estimated cost of $400 million. Ray also said T-Mobile plans to increase the number of its base stations--currently 49,000--by 8 to 10 percent over the next three years.

And though T-Mobile lacks the spectrum to upgrade its network to LTE technology, Ray said T-Mobile does not need new spectrum in the near future, and can refarm its existing 1900 MHz spectrum to keep pace with competitors.  

What impresses me most about T-Mobile's strategy is its dynamism and flexibility. T-Mobile said it plans to aggressively pursue the enterprise market and is open to partnerships as well as to selling non-core assets--such as its tower portfolio--to raise money for spectrum purchases, which Ray acknowledged was a long-term concern. On spectrum, T-Mobile might look to purchase D Block 700 MHz spectrum, more AWS spectrum or partner with another company, he said.

Of course, T-Mobile still faces a number of challenges. The company must explain the benefits of its HSPA+ network to consumers in an already complex market. It also will have to combat the Verizon iPhone--an important task, considering T-Mobile said that 10 percent of its churn was due to Apple's (NASDAQ:AAPL) iPhone at AT&T.

Additionally, T-Mobile's main strength--its HSPA+ network--could become a liability. The company said it does not plan to charge more for faster data speeds, which is something AT&T is rumored to be considering for LTE. And Ray argued that T-Mobile's smaller customer base means it can grow into its spectrum without capacity constraints. However, T-Mobile may have to raise prices for smartphone data, as Sprint has done, if data traffic increases faster than T-Mobile can refarm or acquire new spectrum.

Nonetheless, cheaper smartphones, an improved focus on churn and a faster network are a potent combination for the next few years, which makes me think a deal with Clearwire is not in the offing. --Phil

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