New T-Mobile Pricing Could Damage Its Profits

Telecom & Wireless

Published: March 19, 2015 6:39 am

Investors do not think much of T-Mobile US Inc. (NASDAQ: TMUS), which probably means they do not think well of its aggressive price cutting plans. The carrier’s share price is up less than 6% over the past year, compared to a nearly 13% for the S&P 500.

The latest of these plans is aimed at small businesses. T-Mobile now offers what it says are better features than those of larger carriers. The pricing may be an enticement. However, the most powerful argument against use of the plans is T-Mobile’s low ratings for service among America’s four largest carriers. In the recent J.D. Power U.S. Wireless Network Performance Study, T-Mobile did poorly, although it topped Sprint Corp. (NYSE: S) in several categories. T-Mobile barely did better in a recent RootMetrics report. T-Mobile may believe it can price cut its way to more subscribers, but that is a dicey plan.

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Perhaps the fact that T-Mobile will offer huge incentives for business customers will overcome its quality reputation, as those incentives are strong. Among them:

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T-Mobile only made $247 million on $29.6 billion last year. It has $21.2 billion in long-term debt, on which the debt service will be $9.5 billion. T-Mobile’s ability to fund deep discounts comes with a cost that it cannot afford as easily as the industry’s two giants, AT&T Inc. (NYSE: T) and Verizon Communications Inc. (NYSE: VZ). And it puts the company’s financial position at further risk.

T-Mobile’s new business plan is very aggressive. One potential problem the carrier has to explain to investors is whether it loses money on most of the new subscribers it captures. “Lose money on subscribers and make it up on volume?” T-Mobile might want to pass the answer along to Wall Street.

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