Tag Archives: t-mobile

T-Mobile Provides a Compelling Investment Opportunity

I have written at length about my research regarding government regulation in the wireless telecommunications industry, which I had to conduct for Econ 432. As I studied the regulatory and antitrust issues facing this industry, I because interested in it from an investment stand point as well. Last month, I pitched an investment in T-Mobile (NYSE:TMUS) to an investment club that I am a member in called Michigan Interactive Investments and the club invested in the company following the pitch. Our thesis was that T-Mobile survived an attempted takeover by AT&T in 2011 thanks to an antitrust intervention and since then has come a long way in terms of boosting its network quality and brand reputation. As the primary disruptive force, in a relatively uncompetitive industry, I believe T-Mobile has the capability to disrupt the established business model and steal significant share from its competitors, which is why I recommend investing in it now.

From an industry perspective, wireless telecommunications seems to be a very attractive industry. According to IBIS World Reports, the industry is expected to grow at 6.6% percent over the next five years, outpacing GDP growth. The driver for this growth is not necessarily adding new subscribers, but rather selling existing subscribers more data. Individuals are purchasing more devices that need wireless connections, such as tablets so data needs will continue to rise for some time to come, which will benefit the entire industry.

The necessary requirement in order to sell more data to consumers, however, is a good network. A good network requires heavy investment in infrastructure and spectrum licenses. This mean that barriers to entry are very high, which should protect incumbents like T-Mobile. One question is, though, how does T-Mobile’s network stack up against competitors? According to CNET, T-Mobile CEO John Legere has claimed that the company now has the fastest 4G LTE speeds in some markets, as shown by average speeds on Speedtest.net, a long way from not having LTE at all three years ago. It is true that they are the smallest of the Big 4 wireless companies, but they have made great strides in improving their network. Now that they have a network that they are closer to their rivals in terms of quality, T-Mobile is free to compete on other points like price and contract flexibility in order to win customers.

I also believe now is a great time to invest in T-Mobile because there is a very low-key catalyst that could boost the stock significantly – the 2015 600 MHz spectrum auction. According to the Wall Street Journal, the FCC is planning to auction a significant chunk of spectrum in the 600 MHz range, which has some of the best properties of any spectrum ever auctioned, making it incredibly valuable. All spectrum below 1 GHz is considered low frequency and has excellent propagation and range properties, which make them very valuable to wireless broadband providers. T-Mobile is the only wireless company without significant low frequency holdings as shown below as the WSJ explains.

The key to the 2015 auction is that the FCC is considering imposing caps that limit how much the Big 2 – AT&T and Verizon – can acquire of the low frequency spectrum. This could be a big win for T-Mobile, which would have a clear path at acquiring the spectrum it needs to further improve its network and compete at a higher level with the Big 2.

Because the market may not be fully buying into T-Mobile’s turn around, or may not be fully pricing in the possibility of the company winning low frequency spectrum, I believe the stock may be underpriced at the current level and now is a great time to invest in a company that is one the rise.

 

How to Fix Wireless Telecom in the US

For much of the past semester, I have been studying the wireless telecommunications industry in the US as my personal project for Econ 432: Government Regulations class taught by Professor Jim Adams. In addition to studying past anti-trust cases and non-antitrust regulatory issues, we have also been assigned to study government regulation in one specific industry of our choosing. As someone entering a role in technology, media, and telecommunications investment banking, I thought wireless telecom would be a rich and interesting field for study and I was right.  I wanted to share some of my findings here and describe some of the recommendations I plan to make in my final paper.

When analyzing markets in Econ 432, we were taught to first analyze the relevant product and geographic markets. In this case, the “product” is actually a service – the ability to access a wireless network to transmit data. There are four main wireless telecom companies in the US: AT&T, Verizon, Sprint, and T-Mobile. AT&T and Verizon are considered the “Big Two” as they control over 60% of the market jointly and operate the largest, fastest networks. Because of the extreme seller concentration in this market, any merger activity should be expected to be heavily scrutinized as a potential anti-trust violation. Indeed, we saw one of the most significant anti-trust suits in recent years in 2011 when the Department of Justice blocked AT&T’s attempted $39 billion acquisition of T-Mobile.

The reason behind the high seller concentration is somewhat complex and difficult to avoid. For one, operating a wireless network requires a large up front investment in infrastructure, which makes barriers to entry very high and sets up a natural monopoly scenario. Scale is very important in wireless – marginal costs are low so adding new customers is cheap but high fixed costs mean that in order to drop average costs, operators have an incentive to become large. The other concern is that wireless spectrum licenses are required to transmit signals and the amount of spectrum is fixed and auctioned by the Federal Communications Commission. Companies like Verizon and AT&T can afford to pay the most for spectrum and horde it to prevent up start competitors from threatening them.

Most would agree that the current state of affairs in wireless is not ideal from the consumer standpoint. Options are limited to the four big carriers and customers get locked into two year contracts, limiting their ability to move if they are displeased with their service. The key to making this industry more consumer friendly is the T-Mobile.

T-Mobile, which has traditionally been the innovative, scrappy competitor in a relatively stagnant industry – barely survived the 2011 takeover attempt from AT&T. Now, however, they are on an aggressive campaign to shake up this industry. They have eliminated fixed contracts and rebranded themselves as the “un-carrier.” They have upgraded their network speeds. They offer the most competitive pricing. And so far, this strategy appears to be working. According to a piece in Quartz, more customers that are about to switch carriers say they will move to T-Mobile than any other company:

most-likely-carrier-to-choose-if-switching-in-the-next-six-months-at-t-sprint-nextel-t-mobile-verizon_chartbuilder

Encouraging the competition that T-Mobile brings is key to making this industry more innovative and consumer friendly. Time will tell if T-Mobile’s strategy is effective at gaining market share, but either way the threat that they are bringing to the incumbent’s status quo will be good for everyone – besides AT&T and Verizon shareholders of course.