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T-Mobile USA Has Lower Margins But Higher Growth Than Competitors

November 5, 2014 - Written By David Steele

“There’s no such thing as a free lunch” is one of life’s givens. It sits alongside, “too good to be true” and so T-Mobile USA is proving to shareholders, at least in the short term. The business currently has a keen focus on the consumer and this is impacting the business: reducing price and giving away stuff is hurting T-Mobile’s profit margins. The EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) profit margin has fallen from 26% at the start of 2012 to under 10% as 2014 draws to a close. By comparison, Verizon’s EBITDA profit margin is over 40%! EBITDA is a business’ net income with interest, taxes, depreciation, and amortization added back to it. It’s used to compare profitability between companies or sectors as it removes financing and accounting decisions from the metric. And it means that T-Mobile USA does not generate much profit from its subscribers. They’re the smallest of the big four US national carriers but have been making lots of noise within the industry.

Okay, so T-Mobile is making less money per customer compared with most of the rest of the industry but it is also experiencing the most rapid wireless growth. It’s gaining subscribers quicker than the competition and is expected to soon overtake Sprint. This is the trade-off for running at reduced margins: rapid growth in subscribers. T-Mobile’s bet is that, in the competitive and saturated US market, increasing subscribers will (eventually) come at the cost of its competitors and so it will gain market share. Reducing prices is a great way to gain market share: offer more for less to draw customers in. And T-Mobile’s Chief Executive Officer continues to point out that the high profit margins at Verizon and AT&T is a sign that their prices are too high. However, going forwards, CEO John Legere is now going to concentrate on revenue going forward and expects T-Mobile to improve margins. Has T-Mobile’s strategy changed?

Running a high growth, low profit business may be more attractive to a would-be buyer, because there’s more opportunity to convert that growth into higher profits. When a business is growing rapidly, it acquires a certain amount of inertia: in the case of the cell ‘phone carriers, when one family member switches network and tells everybody about his great deal, other family members will often follow, even if the original deal is no longer available. If T-Mobile are to slowly start to raise prices, bringing them that much closer to the competition, this could have a dramatic positive impact on margins. Would-be buyers of T-Mobile will like the sound of an easy ability to increase profit, but so far we’re yet to see this happen. Indeed, T-Mobile seem determined to prove they can go it alone. As for their free lunch; no it isn’t free, but it’s cheaper than most of the competition.