Friday, January 13, 2017

Commentary: No one quite knows what to do with T-Mobile

Preamble - Malone suggests a new role for T-Mobile USA 

On January 10th, speaking at a Lions Gate Entertainment investor event, John Malone, who owns majorities in Liberty Media, Liberty Global and Liberty Interactive, plus 49% of Starz (since June 2016 a major subsidiary of the Lionsgate Group), 29% of Discovery Communications, and via Liberty Broadband is the largest share holder in Charter Communications, suggested that under a more liberalminded Trump presidency the three top U.S. cable cos - Comcast, Charter Communications and Cox Communications - could combine to acquire Deutsche Telekom's high-performing U.S. mobile subsidiary T-Mobile USA (TMUS) to create a substantial cable and wireless corporation. 

The Malone idea has some merit given the rapid increases in scale and convergence, particularly by AT&T, which in late July 2015 became a major TV player in the Americas via its $49 billion acquisition of DirecTV, and is also hoping to become a major content provider via a possible $85.4 billion acquisition of Time Warner (although that initiative yet to be approved by the company's shareholders, the FCC and DoJ, and has been publicly criticised by Donald Trump, which implies the proposal in its present form may not have a high chance of acceptance).

However, the Malone suggestion also has a slightly bizarre quality about it given that according to a recent analysis by 24/7 Wall Street, Comcast is the No. 1 most hated company in the U.S., while Charter is at No. 12, whereas judging by the steady flow of mobile customers eager to sign up with T-Mobile each quarter, it must be one of the most popular consumer-oriented institutions in the country. 

While allowing for a degree of media hyperbole in the characterisation of Comcast and Charter and the attractions of building a strong third communications pole with a full services capability able to take on AT&T and Verizon at any level, the operational chemistry for such a deal does not seem good, particularly when taking into account the unusual character of John Legere, CEO of TMUS and the obvious architect of its current success. 

T-Mobile Q3 2016 results very strong 

To get some idea as to why Malone's suggestion seems a little far fetched one needs to look at the remarkable TMUS results for Q3 2016, announced October 24th, when it reported: 

• 2.0 million net mobile additions, the company's 14th consecutive quarter it had signed up at least a million new subscriptions, implying significant gains in market share against two of the world's largest and most successful communications operators, AT&T and Verizon. 
• It ended the quarter with 69.4 million customers. 
• 1.32% branded post paid churn. • Service revenue of $7.1 billion, up 13.2% year on year, making it the industry leader in growth for the 10th consecutive quarter. 
• Total revenue of $9.2 billion, up 17.8% year on year, making it the industry leader in growth for the 13th time in the past 14 quarters. 
• Adjusted EBITDA of $2.6 billion, up 37.8% year on year. • Net income of $366 million, up 165% year on year. 
• 4G LTE coverage of 312 million pops, almost identical to that of Verizon. 

During the Q3 teleconference on the results, Legere said: - 'Don't forget, our network is still the fastest in America, It has been the fastest in both download and upload for 11 quarters in a row, upload speeds are becoming increasingly important with the rise of social sharing, and upload speeds are almost 50% faster than Verizon, the closest competitor'. 

(NB: as of the close January 12th T-Mobile US was valued at $57.15 per share, or $47.1 billion, and over the last 52 weeks the company's stock price has moved between a low of $33.23 and a recent high of $59.46.) 

Deutsche Telekom's position 

A few years ago Deutsche Telekom seemed quite keen to dispose of TMUS, and in May 2014 an offer from Sprint's new owner Softbank of Japan was accepted in principle, but collapsed in August 2014 following opposition from U.S. regulators, who were insistent on keeping four wireless competitors in the market. Softbank owner Masayoshi Son in late 2016 made it clear he still hoped to cut a deal.

As T-Mobile has got larger and more profitable the attitude of Deutsche Telekom, which owns 65% of the company, has subtly changed and the parent has become more helpful in providing lines of credit to help its expansion. Notably, in mid November 2016 Deutsche Telekom CEO Tim Hoettges, speaking at the Morgan Stanley annual TMT Conference, was quoted as saying that it was not 'in the mood' for selling the business and was in the mood of 'where is the partner we need'. With TMUS approaching the size of its German parent and still growing fast, it is beginning to look like Deutsche Telekom's greatest opportunity for growth. 

John Legere's position 

The TMUS CEO, who frequently dresses like a yester year pop star in leather and jeans, is obviously on a high and in such circumstances may be excused some of his more outlandish statements, including liberal non family-friendly cursing and the baiting of his two main rivals (for example 'either those bastards change or we take over the industry'), who often rise ponderously to the bait. Nevertheless, whatever his personal peculiarities there seems little doubt that he is a genuinely effective and transformative manager rather than the lucky inheritor of a favourable business trend. 

In late 2012, Legere took over a company that was bleeding subscribers and whose revenue growth was declining. Since then, he has dramatically reversed those trends through a number of well designed sales packages and through re-motivation of the company's staff and his company now has genuine momentum. Since he took over T-Mobile the customer base has doubled and in early August 2015 T-Mobile announced that it had moved past Sprint to become the country's third largest operator in terms of subscriptions. 

In January 2014, TMUS announced that it was moving into mobile banking via a deal with Bancorp and Blackhawk Network Holdings. Whilst not particularly advanced the solution offered basic banking services: a prepaid Visa card; a mobile app customers could use to deposit checks, pay bills, transfer funds and reload cards; and access to AllPoint’s partner network of 42,000 ATMs to withdraw cash. Moreover, though behind Sprint, Legere appeared to be well ahead of the two larger rivals. The opportunity was not negligible and at the time it was said that the unbanked in the U.S. numbered about 68 million, or around 20% of the population. 

On August 18, 2016, Legere announced his boldest move yet, with a genuinely unlimited data plan called TMobile ONE priced at $70 a month for the first subscription in a family, $50 a month for the second subscription, with additional lines only $20 a month and up to 8 lines with auto pay. The only qualification was that the very heaviest users might find their applications given lower priority at times of congestion. 


Brilliant as its performance is in the short and even medium term, there is a core problem for T-Mobile, highlighted by the Malone suggestion, which is convergence. Legere seems to think that given enough capacity and intelligence the mobile can fulfil all of a user's digital needs and given his energy and creativity he can probably grow the company for another five years. Fibre, at least in the U.S., is on average much further behind wireless in than in many other developed countries, so that position may be plausible. However, that still leaves the question of content and large operators across the world seem to feel the need to increasingly control directly a good proportion of the content they transmit. Maybe, given his drive and creativity, Legere can come up with a solution to that problem as well.