T-Mobile: The Cost of Being the UnCarrier

by Matt Klassen on February 26, 2014

Almost a year ago T-Mobile undertook a significant rebranding process, shedding the image of a standard wireless provider and adopting a radically new approach to the mobile industry, the company dubbing itself the ‘UnCarrier.’ The nation’s fourth largest wireless provider promised a different way of doing things, changing the way the industry approached service contracts, phone subsidies, early upgrades, and even early termination fees.

While such an approach has achieved its goal, attracting a torrent of new customers to T-Mobile, such change hasn’t come without cost, as the company posted significant losses in its fourth quarter report for 2013. In fact, the company’s losses ballooned to $20 million, or 3 cents per share, an increase from a loss of $8 million over the same quarter in 2012. The report also indicated that T-Mobile’s revenue increased significantly, up 39 percent over the year previous.

So perhaps there’s something to be said about the old adage, you have to spend money to make money, as much of T-Mobile’s staggering losses can be attributed to significantly higher spending on promotions, a carpet bomb style advertising blitz the company hopes will pay long term dividends.

Although the cost of being the nation’s UnCarrier is starting to take its toll on T-Mobile, there’s no question that the company’s new business model is doing the one thing it was designed to do: attract new customers. The company said that it added a total of 1.6 million new customers in Q4, that’s up from 1.02 million in Q3 and significantly more than the 515,000 customers the company lost over the same period in 2012. The company ended the Q4 2013 with 46.7 million total customers.

The news gets better on this front for T-Mobile as well, as many of those new customers, approximately 869,000, were of the more valuable postpaid variety, with 112,000 opting for the company’s prepaid service. For eccentric company CEO John Legere, that means the UnCarrier strategy is working.

“Customers are fed up with the old ways and are voting in favor of choice, innovation and doing business with a company that cares about them and is willing to earn their business,” he said in a statement. “For shareholders, we transformed the company into a fierce, growing competitor that is changing the wireless industry and creating significant value.”

But this new UnCarrier persona doesn’t come cheap, and two key metrics could point to long term problems for maintaining such a spendthrift promotional pace. First is the average revenue per user (ARPU), the amount on average each subscriber pays the company each month. This number has dropped from the third to the fourth quarter in 2013, with T-Mobile reporting that average customer spending has gone down 2.9 percent, or down to about $50.70 per month.

The reason for this drop is easy to find, as subscribers are increasingly adopting T-Mobile’s for affordable value plans, one’s that no longer bundle equipment and service plans the way old postpaid contracts did.

The second telling measure is the average the company spends on each new customer, a number that has jumped $10 to a total of $317. The company attributed this increase to promotions over the holiday season, particularly ones where T-Mobile promised to pay early termination fees.

In the end, paying more to attract customers and getting less in return is never a good way of doing business, at least not in the long run, but if T-Mobile can effectively transition out of this promotional honeymoon period to a more stable long term relationship with its new subscribers—while keeping its churn rate low—these losses will likely pale in comparison to the strong gains the company will make.

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Written by: Matt Klassen. www.digitcom.ca. Follow TheTelecomBlog.com by: RSS, Twitter, Facebook, or YouTube.

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