T-Mobile One Is Off to a Strong Start
Image source: T-Mobile.
It didn't take long for T-Mobile's (NASDAQ: TMUS) new unlimited-data plan to have a measurable impact on the company's operating metrics. The third-place wireless carrier saw its average revenue per postpaid phone subscriber climb 1.6% on an adjusted basis in the third quarter. (T-Mobile launched the new plan on Sept. 1 and the quarter ended Sept. 30.) What's more, T-Mobile was able to raise its average revenue per user while signing up more customers to family plans -- which typically cost less per line but have lower churn rates.
When T-Mobile unveiled its new plan, called T-Mobile One, I noted it was a price increase for most existing customers and expected it to largely affect new subscribers. With 851,000 net postpaid phone additions last quarter, T-Mobile managed to increase service revenue significantly quarter over quarter. But even management was surprised somewhat by the strong uptake of T-Mobile One.
80% of new customers
During T-Mobile's earnings call, management noted several times that 80% of new customers are signing up for T-Mobile One. They say that's better than they were expecting.
T-Mobile still offers its Simple Choice tiered data-bucket plans, but customers have to call or visit a store to sign up. T-Mobile One costs $70 per month for the first line, compared with $50 per month for one line on its Simple Choice 2GB plan. A family of four can subscribe to T-Mobile One for $140 per month, or $35 per line, but the 2GB Simple Choice plan costs just $100 per month for four lines. It's $120 per month for four lines on the 6GB Simple Choice plan and $180 for the 10GB version.
Perhaps more surprising, it's not just new customers signing up for T-Mobile One. T-Mobile says its existing base is also adopting the plan rapidly. Most customers are already effectively getting unlimited data through Simple Choice plans thanks to T-Mobile's initiatives such as Binge On and Music Freedom, which don't count video or music streaming data against customers' caps.
T-Mobile's ability to continue attracting both new and existing customers to its new unlimited plan should lead to continued improvement in revenue per subscriber.
And it won't hurt the network, either
Equally as important for T-Mobile and its investors is that there's no additional strain on the company's wireless network from T-Mobile One. In fact, Chief Operating Officer Mike Sievert noted that the network is faster after launching T-Mobile One, probably because of regularly scheduled improvements.
T-Mobile has a strong spectrum position. It has more spectrum per customer than AT&T (NYSE: T) or Verizon (NYSE: VZ), and it's quickly migrating more of its customers to LTE from 3G. As it does so, it can refarm 3G spectrum to redeploy as LTE to add capacity for T-Mobile One.
T-Mobile will also benefit from a relatively strong position in the ongoing incentive spectrum auction. AT&T has a lot of money tied up right now in a potential acquisition, so its bidding power is greatly diminished. That will leave it mostly bidding against Verizon and smaller carriers. While it may take some time to acquire the spectrum, T-Mobile should be able to easily secure whatever it needs for its network.
What the future of T-Mobile looks like
Ultimately, T-Mobile plans to migrate all of its customers to T-Mobile ONE. The simplicity of the service will reduce a lot of overhead expenses such as customer service. It could also reduce customer retention problems, reducing churn rates. As such, T-Mobile wouldn't have to spend as much on customer acquisition -- or it could see higher net adds per marketing dollar.
All of that translates into higher margins. Coupled with higher average prices per line and adding more subscribers than anyone else in the industry, that's a strong recipe for earnings growth.
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Adam Levy owns shares of Verizon Communications. The Motley Fool recommends T-Mobile US and Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.