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5/1/2014
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T-Mobile: Paying Customers Pays Off

T-Mobile added a record number of new customers in the first quarter, but did it sell its soul to get them?

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In the battle for customers, T-Mobile's aggressive tactics have paid off. The company has shaken up the wireless industry while adding customers and increasing revenue.

T-Mobile CEO John Legere launched the company's Uncarrier campaign -- in which the company redefined the traditional contract agreement, among other changes -- last year, threatening to turn wireless network operators' businesses on their heads. There's no denying Legere's strategy has had a positive effect, but there's a dark side to T-Mobile's success.

During the first quarter of the year, T-Mobile added 1.3 million postpaid customers -- more than AT&T, Sprint, and Verizon combined during the same period. T-Mobile says net customer additions, which include MetroPCS and other subscribers, reached 2.4 million. Revenue climbed, too, by 47% year-over-year, to nearly $6.9 billion. The company sold a record number of smartphones, 6.9 million. T-Mobile said 92% of its customers bought smartphones, compared to 91% during the fourth quarter of 2013. Smartphones now make up 81% of its customers, up from 79% during the fourth quarter.

T-Mobile has increased its total customer base from 34 million a year ago to 49 million. The company is within striking distance of Sprint, which continues to bleed customers (who are likely switching to T-Mobile). Sprint has 55 million customers. Both T-Mobile and Sprint trail AT&T and Verizon, however, by tens of millions of customers.

How did T-Mobile make such big wins? Hard work, a little business savvy... and cold, hard cash.

[Will LG's upcoming G3 smartphone help the company gain traction in the market? Read LG Makes Gains As G3 Debut Nears.]

T-Mobile's Uncarrier initiatives are certainly appealing to customers. The company abolished the idea of signing contracts. It separated the cost of the device from the cost of the service, which has helped give consumers a more realistic understanding of the costs of smartphones and other hardware. The company also allows customers to jump to new devices more frequently, playing on consumers' resentment at being stuck with the same phone for two years. Further, T-Mobile offers tablets 200 MB of free data with no contract. (T-Mobile added 69,000 tablet customers during the first quarter.) It offers free and low-cost service to customers who roam overseas. And finally, the company has aggressively improved its network with added coverage and faster service.

All these factors forced AT&T, Sprint, and Verizon to respond. T-Mobile's competitors have all introduced no-contract, early-upgrade plans. They've also reduced the pricing on some plans to better match T-Mobile's. So far, this is all good for the consumer.

T-Mobile did another thing, however, that used to be frowned upon in the industry: It put a bounty on new customers. In January, T-Mobile offered to pay consumers' early termination fees (ETFs) if they switched to T-Mobile. Further, the company said it would pay contract-breakers for their old handsets. That means new customers stand to each net $650 in credit with T-Mobile when they dump their carriers. That's a huge incentive for consumers to change carriers (which the industry calls churn). Carriers have tried to offer bounties for customers before, but the deals -- usually around $100 or $200 -- have never been so sweet. T-Mobile's offer is akin to paying for new customers.

These customer acquisition costs hurt T-Mobile's balance sheet during the first quarter, during which the company lost $156 million. T-Mobile said 21% of its postpaid additions, about 273,000 customers, asked for ETFs to be reimbursed. Before the program went into effect, T-Mobile estimated that it would end up spending about $300 on average (rather than $650) to acquire these customers, thanks to pro-rated ETFs and estimates on the cost of replacing phones. Using that figure, T-Mobile spent about $82 million to pay for these new customers -- more than half the company's recorded loss.

Since T-Mobile continues to offer this cash discount to new customers, it will surely hit the bottom line during the second quarter, too. It's a pricey way to swell the ranks -- one that the company can't afford to support indefinitely.

IT is turbocharging BYOD, but mobile security practices lag behind the growing risk. Also in the Mobile Security issue of InformationWeek: These seven factors are shaping the future of identity as we transition to a digital world. (Free registration required.)

Eric is a freelance writer for InformationWeek specializing in mobile technologies. View Full Bio

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LisaM646
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LisaM646,
User Rank: Apprentice
5/1/2014 | 9:25:06 PM
Re: T-Mobile worth the look, especially if you are a Verizon customer
Hi Terry! I'd love to look over that with you. I'm your local T-Mobile business rep for the MN/WI region. Email me at Lgmendenhall@gmail.com and I'll redirect you to my business address. I work with a lot of customers in Milwaukee and we have (and are continuing to make) great strides in the network in your area!
TerryB
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TerryB,
User Rank: Ninja
5/1/2014 | 1:24:16 PM
Re: T-Mobile worth the look, especially if you are a Verizon customer
Interesting. We looked at T-Mobile about 5 years ago as a North America wide common solution, replacing individual contracts the biz units had with various carriers. The pricing was certainly better back then but several of us did not have adequate service. My unit is in Appleton WI. We also had units in Franklin KY, Grenada MS, Delaware OH and Buffalo NY.

In Appleton, they did not even have local towers or local presence. The closest phone numbers we could get were in south WI, meaning 10 digit dialing all the time. They had roaming contracts on the local towers, the service actually worked better than AT&T we were using. But the long distance numbers (from our desk phones) and their inability to port our current numbers stopped us from switching.

Franklin and Grenada could not get adequate service in their areas with the test phones, did not switch. Delaware tested OK (or didn't test at all) and made switch. But they switched again in about a year, service was not adequate. Seemed to work OK in Buffalo, I believe they still use.

It would be interesting to see what strides they have made. It would also be interesting how there contract buyout thing would work in business contract with AT&T. AT&T sets discounts on their rate plans depending on the billing you have with them. The people that signed our contract made huge mistake in that amount, something we don't get close to obtaining. So we get 11% discount on plans based on that amount when true billing amount would only entitle us to 9-10% discount. Year after year, AT&T never says "boo" about that. But in that year, when they found out we were looking at T-Mobile after an inquiry on what cancellation process was, they threatened to bill like $5000 for all the unearned discount. Once we didn't switch, never heard from them again on that.

So makes me wonder if T-Mobile money would go towards that? We have 30 users, at $650 a piece that's close to $20K, which would eliminate that sword over our head.

And yes, I have looked into creating new contract with AT&T at proper discount levels but they don't seem to care. Tells me they are perfectly happy with money they make at 11% discount and they are well aware that gives them lock in leverage.

But whether I want to go thru all that again with T-Mobile is nother story. Managing cell usage is just a side thing from my primary job as developer. I kid them here they pay me to manage these #$&* phones and I write code for free, that's how much I hate dealing with those guys. All of them. But maybe the times are a changin?
aaronchriscohen
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aaronchriscohen,
User Rank: Apprentice
5/1/2014 | 12:55:15 PM
Tmobile ETF Buy out
To my knowledge this is wrong. T-Mobile only offered to pay ETFs on the condition you traded in your old device. They never offered to pay your ETF and buy your device. 
Trey B
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Trey B,
User Rank: Apprentice
5/1/2014 | 12:40:50 PM
T-Mobile worth the look, especially if you are a Verizon customer
I am extremely satisfied with T-Mobile going from a $120 a month plan at Verizon to a $50 prepaid plan with all the voice, text and data I was paying 2X as much for at Verizon. They have since changed their plan, but let's be honest - Verizon had been overcharging all it's customers for a very long time. Text service is virtually free for the carriers to offer, Verizon was charging $10 a month (pure profit), I chose to migrate to T-Mobile for a few specific reasons. First off, is privacy andf security: Verizon profits from selling your voice and data history to the Government (yes, both of it), and without my permission, so Verizon fails if you are concerned about privacy. 2nd is cost: since the switch I have saved enough money per month to pay my cable bill. 3rd is reception and speed: In out area, T-Mobile was the 1st to offer 4G and my data in supersonic. 2 year contracts were the biggest scam in the cell phone business, and T-Mobile in my opinion offered me better service, on the best devices, at the lowest cost, with my privacy respected.
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