Benefitting from AT&T breakup settlement, T-Mobile pushes ahead with "Challenger Strategy"; Philly an important market

Tom Paine

Bellevue, Washington-based T-Mobile USA , the U.S. wireless operation of Deutsche Telekom AG, has been a relatively strong player in the Philaldelphia market, having a #3 position with market share in the mid-teens, according to 2010 data from the Yankee Group (pdf). But in the wake of its failed $39 billion merger agreement with AT&T, terminated by AT&T in December of last year as the deal faced outright rejection or at least crippling restrictions from the DOJ and the FCC, T-Mobile has had to gear up with a new game plan to remain viable as an independent competitor, at least for the time being. It is doing this with what it calls its "Challenger Strategy", announced in February, which includes a $4 billion investment presumably funded in part by the $3 billion AT&T merger termination fee, a focus on adding and "refarming" spectrum with the goal of expanding HSPA+ service and launching LTE in 2013, adding a new lineup of devices, launching a major rebranding campaign, and targeting new market segments.

On the spectrum front, T-Mobile USA recently completed a swap with Leap Wireless that included trading some spectrum in the Philadelphia, Wilmington and Atlantic City markets. While T-Mobile also gave up some local spectrum in the deal, the swap helps improve weakspots in its coverage in the area in a significant way. The huge transfer of spectrum from AT&T to T-Mobile as part of their breakup settlement was approved by the FCC in late April; although it doesn't impact the Philly market specifically, it is critical to T-Mobile's nationwide 4G plans. Some of the spectrum T-Mobile really desires is that included in the proposed $3.6 billion sale of SpectrumCo by its joint owners Comcast (63%) and other cable operators to Verizon Wireless announced in December, shortly before the AT&T/T-Mobile deal was terminated. In fact, T-Mobile has suggested that had it not been locked up with AT&T at the time, it might have (with Deutsche Telekom's backing) been a bidder for at least some of the SpectrumCo AWS bandwidth, which includes strong coverage in the Philly area. Verizon has offered to sell some of its unused 700MHz spectrum, perhaps in hopes of quieting some of the criticism of the deal, but T-Mobile says that spectrum doesn't suit its needs and may takes years to utilize because of problems that would need to be fixed concerning interference with some existing TV spectrum.

Opposition is mounting to the SpectrumCo/Verizon Wireless deal, which was announced in conjunction with a joint marketing agreement between Verizon and the cable operators involved in SpectrumCo (and Cox) under which the partners would jointly remarket each other's services. The joint marketing arrangement has already been rolled out in some markets. What on the surface might have looked like a simple spectrum sale has the appearance to some of a giant end-run around the regulatory process to achieve outcomes that could be anti-competitive in both the wireless and broadband markets. T-Mobile has formally requested that the FCC scuttle the deal, and is joining a new coalition to be announced today that will include, ironically, some of the same groups that led a similar coalition against the AT&T/T-Mobile deal.

Last week, during the wireless industry's CTIA conference in New Orleans, reports (not comfirmed, though not exactly given an outright denial by T-Mobile USA CEO Philipp Humm) surfaced that T-Mobile was in discussions with Metro PCS about a possible combination of the two businesses. Bloomberg's article said that Deutsche Telekom is also considering an IPO or outright sale of T-Mobile USA, though it is not clear who could or would be able to buy it. The FCC's public policy goal seems to be to maintain four big players in the market, and the major cable operators are not potential buyers at least as long as they pursue the arrangement with Verizon. Reuters also reported last week that AT&T has been in talks with Leap Wireless, another potential T-Mobile target.

T-Mobile announced last week that it had chosen Ericsson and Nokia Siemens as the vendors to expand its HSPA+ service and construct its new LTE network. T-Mobile also said it would support HSPA+ for unlocked iPhones by the end of the year, although no deal is in place yet for T-Mobile to actually sell iPhones, which is an expensive proposition for carriers. T-Mobile currently does support many unlocked iPhones in a 2G mode. Part of T-Mobile's spectrum plan is to "refarm" existing spectrum to enhance its 4G coverage. Its PCS 1900 Band, now dedicated to GSM traffic, will support a good portion of its HSPA+ traffic by mid-2013, while its AWS 1.7/2.1 Band, now completely dedicated to HSPA+, will take on increasing amounts LTE traffic.

Source: T-Mobile presentation to FCC

The carrier has also upped its planned advertising spend for the year and says it will launch a major rebranding effort in the Fall. Its new ad campaign features its well recognized advertising personality Carly Foulkes altering her image by changing into a black leather jumpsuit and riding away on a motorcycle. The motorcycle is intended to emphasize the speed of 4G.

T-Mobile says its "Challenger Strategy" is centered around "making amazing 4G services affordable", but some industry observers question the economics of its lower cost data plans and increased emphasis on the prepaid and wholesale segments. But T-Mobile believes it has the network capacity to make it work.

On the device front, T-Mobile is also working hard to rev up its product line. In late April it launched the well-reviewed HTC One S, which runs on Android 4.0 Ice Cream Sandwich. During the first quarter, T-Mobile became the first U.S. carrier to offer a Nokia Windows phone, the 4G-capable Nokia Lumia 710, and launched the 42 Mbps-capable Samsung Galaxy S. It is also launching a lower-priced 3G smartphone from Huawei, the T-Mobile Prism, this month. There also reports by analysts in the Mobilesphere who track new models in the pipeline that the Samsung Galaxy Note is coming to T-Mobile.

T-Mobile USA also reported its quarterly results last week along with its parent, and continued to lose contract customers, at a rate of 510,000 in the first quarter, although Humm said it achieved its lowest churn rate in the last seven quarters. It did report a net gain in total customers, though, through prepaid and wholesale increases. Total revenue of $5 billion was down slightly from a year ago, and adjusted OIBDA (Operating Income before depreciation and amortization) was $1.27 billion, up 7.2% from $1.19 billion reported in the first quarter of 2011.

Philadelphia has long been one of the more competitive wireless markets, and frequently has served as a testing ground for new services. For example, in 2009 T-Mobile launched its HSPA+ service first in the Philly region in 2009, and it was also the first major market for Clearwire's Clear in 2009.

Marty Pisciotti
T-Mobile named Marty Pisciotti as vice president & general manager for the Philadelphia Tri-State region last year.
Pisciotti's region covers Philadelphia and the surrounding suburbs, as well as T-Mobile’s presence across Delaware, Pennsylvania, southern New Jersey and upstate New York. His region generates over $1 billion in annual revenue. Pisciotti's appointment was part of a regionalization initiative by the company aimed at improving responsiveness to conditions in local markets. For example, T-Mobile wanted to get a better understanding of how to be more visible in the community, use local media for advertising, and manage channel relationship with retailers and partners. Pisciotti understands retail, as he was a former Circuit City regional exec.

Another of Pisciotti's tasks is to increase penetration of specific market segments, as he told Philly Tech News in a phone interview. One of those segments is Business to Business, including the very small business market (less than five employees). For example, during Philly Tech Week T-Mobile held an seminar to help small businesses understand how they can utilize mobile payments service Square and mobile forms builder Canvas. This is part of a broader initiative by T-Mobile, which was the first wireless carrier to offer Square readers in some of its stores and preloads a collection of apps it calls the App Pack on some models, which includes DropBox, Evernote, TripIt, and LinkedIn in addition to Square. T-Mobile is also offering special service plans for small businesses, and redesigning the layout of its company-owned stores to enable a more consultative sales process. T-Mobile is also expanding its salesforce to reach larger B to B customers as well.

T-Mobile has approximately 90 company-owned retail outlets in the Greater Philadelphia region, of which about 40 stores are scheduled to flip to the new “Global Design Concept” format this year (see a time lapse video of how they do the changeover quickly). T-Mobile also sells through mass market retailers like Wal-Mart and Costco, as well as specialized independent retailers and other partners. Recently it has been trying to expand its network of independent retailers.

RootMetrics just released its new report and in the Philadelphia market ranked T-Mobile third overall, saying that T-Mobile showed "the most dramatic increase" in downloads speeds compared to its tests last year.

T-Mobile announced in March it was closing its Allentown call center in June, a move that could cost more than 600 workers their jobs. This decision was part of a national cost-cutting strategy rather than a reaction to local market conditions, Pisciotti says.

Update 5/15/2012: T-Mobile USA's Philipp Humm announces restructuring, 'difficult decisions' to staff.