T-Mobile's Plan to Become a Major Internet Service Provider

T-Mobile (NASDAQ: TMUS) has big plans once it gains approval for its merger with Sprint (NYSE: S). As part of its 5G network build-out, T-Mobile plans to offer in-home broadband internet service, and by 2024 it expects to become the fourth-largest internet service provider, with 9.5 million subscribers.

Using its nationwide wireless network will allow T-Mobile to offer the service across the country, operating in 52% of U.S. zip codes. By 2024, T-Mobile expects to offer in-home broadband covering 68% of Comcast's (NASDAQ: CMCSA) territory and 62% of Charter's (NASDAQ: CHTR). And it should be able to take market share just as it's done with its wireless phone service.

How T-Mobile can compete in broadband

The acquisition of Sprint will give T-Mobile access to a lot of valuable spectrum. T-Mobile plans to deploy that spectrum along with its own holdings in the low- and mid-band ranges to create wide coverage with good network density (which helps increase network speed and capacity).

In some markets, the combined network capacity provided by the additional spectrum holdings of Sprint will greatly exceed what T-Mobile expects wireless customers to consume. Those are the markets where it plans to offer in-home broadband service.

Since T-Mobile will simply use excess network capacity to provide home internet service, its marginal cost of delivering the service is very low. That means it can offer extremely competitive pricing compared to Comcast or Charter. T-Mobile also won't require professionally installed equipment at the customer's home, further reducing costs for both T-Mobile and customers.

Offering a customer-friendly service, as it's done with wireless, could enable T-Mobile to scale the service quickly. Giving customers more choice (in equipment, installation, lack of contracts, etc.) and better customer service, a major area of investment for T-Mobile, could help it differentiate from the minimal competition it faces. Most markets only have one or two options for high-speed broadband; some markets have no options at all.

The threat to Comcast and Charter

It's not just T-Mobile that's going to compete against Comcast and Charter. They're going to face competition from the entire wireless industry.

Broadband connections have been a bright spot for both companies as consumers continue to cut the cord. Comcast ended the second quarter with 26.5 million internet customers, and Charter ended the period with 24.6 million. What's more, those numbers are growing; each added over 1 million new customers over the past year, while video subscribers declined.

T-Mobile and other wireless carriers could cut into cable companies' subscriber counts over time, for a couple of reasons. As mentioned, T-Mobile's low marginal costs and lack of installation requirements will allow it to offer extremely competitive pricing. Additionally, T-Mobile and other carriers are likely to interact with customers more often when they want to upgrade their smartphones every few years. That provides a great opportunity for T-Mobile to sell its in-home broadband service to customers.

Comcast and Charter have the capabilities to offer greater speeds than 5G networks could provide, thanks to their wireline connections. But greater speeds provide declining marginal returns -- it's hard to think of consumer applications that need speeds any greater than 100 Mbps. (That could change in five years, though.)

T-Mobile expects to offer average speeds of 300 Mbps or greater to 250 million households by 2024, with 200 million of those homes receiving average speeds of 500 Mbps.

T-Mobile and other wireless carriers could put a serious dent in the growth of Comcast and Charter, thanks to the unique advantages of offering in-home broadband via wireless connections. They also have an advantage in interacting with customers more often than cable providers, presenting an opportunity to switch customers to the new service more quickly.

10 stocks we like better than T-Mobile USWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and T-Mobile US wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 6, 2018

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Comcast and T-Mobile US. The Motley Fool has a disclosure policy.