Wireless carriers were extremely aggressive last year when Apple (NASDAQ: AAPL) released the new iPhone. Soon after Apple announced the iPhone 7, T-Mobile (NASDAQ: TMUS) started offering subscribers a free iPhone if they traded in an eligible device. It didn't take long for Verizon (NYSE: VZ), AT&T (NYSE: T), and Sprint (NYSE: S) to start copying T-Mobile's promotion.
"It turns out free iPhones weren't a great way to get people to switch," T-Mobile COO Mike Sievert said at the Goldman Sachs Communicopia Conference earlier this month. "We led the way with free iPhone last year, and within a few days everybody had copied it. And we looked at ourselves and said, 'Okay, well, what exactly does this accomplish?'"
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It seems the industry learned its lesson. Promotions are much more tame this year, with T-Mobile and Verizon offering $300 off a new iPhone with a trade-in. Sprint is offering the new iPhone for $0 per month with a trade-in, but that's just to lease the device. AT&T, meanwhile, continues to go after bundlers, offering a buy one, get one deal for subscribers that take both wireless and television.
The less aggressive promotions for one of the biggest phone launches of the year may indicate that the days of hyperaggressiveness in the wireless industry are coming to an end.
Good news for AT&T and Verizon
AT&T and Verizon have definitely bit the bullet as T-Mobile and Sprint work to offer more customer-friendly prices and services. The duo combine to control about 75% of the the industry's EBITDA, so they'd be happy to keep everything as it is (or, better, as it was). It's no surprise that the two wireless leaders are always following T-Mobile in its efforts from unsubsidized devices to unlimited data plans.
While AT&T and Verizon's reluctance to follow T-Mobile's aggressive efforts is understandable, it's nonetheless cost both companies subscribers. That's why when T-Mobile offered free iPhones last year, the two had no choice but to follow suit. iPhone launches are a big time of year for customers to switch carriers, and the two couldn't risk losing even more subscribers.
As T-Mobile (and Sprint, to a lesser degree) makes less aggressive moves, it'll be easier for the two larger carriers to stomach. They'll be able to retain subscribers more easily, and allow more revenue to fall to the bottom line thanks to both higher retention rates and lower customer acquisition costs.
T-Mobile is entering a new era
T-Mobile's decision to offer a less aggressive iPhone promotion this year isn't only dictated by the fact that it didn't exactly work out last year. T-Mobile is now focused on growing its free cash flow, which requires it to be much more considerate of the economics of its promotions. Management expects to grow free cash flow at a compound annual growth rate between 45% and 48% through 2019.
The company is also once again in talks to merge with Sprint, which would significantly reduce the pressure to continually add new subscribers to capitalize on the same economies of scale as AT&T and Verizon. That means it could be less aggressive, and focus further on growing free cash flow.
Investors should expect T-Mobile to continue decreasing its aggressiveness in the wireless marketplace as it looks to grow free cash flow. That doesn't mean we won't see things like free Netflix, it just means promotions will be designed to migrate existing customers to its higher-priced unlimited plan and keep them from switching to competitors. (The Netflix deal is a perfect example.)
The less aggressive iPhone promotions may be just the start of a T-Mobile more focused on the bottom line. That's good for T-Mobile, which is now starting to see its investment efforts pay off. It's also good news for AT&T and Verizon investors, who have suffered during the period of hyperaggressiveness and economics-destroying deals led by T-Mobile.
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Adam Levy owns shares of Apple and Verizon Communications. The Motley Fool owns shares of and recommends Apple, Netflix, and Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.