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T-Mobile's Epic Market Share Grab

Updated from 10:01 a.m. ET to include credit analysis, additional detail throughout.

NEW YORK (TheStreet) - Can T-Mobile (TMUS - Get Report) make money by stealing customers from AT&T (T - Get Report) and Verizon (VZ - Get Report)?

That's the biggest question hanging over the telecom sector, after a year of consolidation re-configured the industry and may have created two new disruptive forces in T-Mobile and Sprint (S). It's also a story to watch for AT&T and Verizon, which set new records for wireless profit margins in 2013.

If T-Mobile can become profitable in 2014 and beyond, it may prove that reliable nationwide wireless data service is in the process of becoming a commodity product with falling pricing. That would have major implications on AT&T and Verizon, who both profited, in recent years, from a consumer shift to smartphone devices and higher data consumption at faster speeds.

Currently, consumers pay good money for the reliability and speed of AT&T and Verizon's data service. Given a low-cost alternative, however, habits may change.

That's exactly what T-Mobile is banking upon.

The telecom has defined itself as the "un-carrier," and broken about every rule AT&T and Verizon adopted to drive their rising profits in recent years. T-Mobile doesn't lock customers up to multi-year service plans, it is buying customers out of their existing contracts, and is attempting to offer data plans at a fraction of the price of larger competitors.

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So far, T-Mobile's results indicate that when given a good deal consumers take notice.

After years of market share losses and declining subscribers, T-Mobile added 1.6 million customers in the fourth-quarter of 2013 and over 4.4 million subscribers for the full year, when counting the company's acquisition of MetroPCS. T-Mobile's fourth-quarter results were accentuated by nearly 1 million branded net customer additions and 869,000 postpaid net addition, its performance since the fourth quarter of 2005.

Those results indicate that the first part of T-Mobile's strategy is taking hold. It is offering a cheaper alternative, and consumers have responded.

Still, T-Mobile is a for-profit enterprise with a base of shareholders that are either betting that the company can profitably steal wireless market share, or will eventually be acquired by the likes of Sprint (S) or DISH Network (DISH).

The second step for T-Mobile is to prove it can make money by undercutting competitors.

On that front, the company's full-year results provide a hazy picture. T-Mobile reported a net loss for the full-year, and adjusted earnings before interest, taxes, depreciation and amortization fell year-over-year.

Meanwhile, the company burned about $500 million in cash in 2013, according to a Wednesday analysis from independent bond rating firm Gimmie Credit. T-Mobile's is expected to have negative cash flow in 2014, given guidance its of between $4.3 billion and $4.6 billion in capex this year.

A formula of fast subscriber growth, a cash burn, and uncertain profitability proves T-Mobile is in the midst of a market share grab.

So will that grab at AT&T and Verizon customers eventually bear profits?

The scary story for AT&T and Verizon in 2014 is that, yes, T-Mobile's strategy may become profitable. The problem is it won't be anywhere near as profitable as what the nationwide wireless data carriers enjoyed in recent years.

"Ultimately, what matters is whether the present value of acquired subscribers is positive," Craig Moffett, co-head of MoffettNathanson Research, wrote in reaction to T-Mobile's earnings. Moffett, a long-time telecom sector analyst, believes that the NPV is positive.

Moffett calculates T-Mobile is generating a NPV of north of $700 per subscriber, excluding costs to buy consumers out of their existing contracts. "That's high enough to suggest that they can happily sustain the program indefinitely, and that they will rapidly accrete value as a result," the analyst wrote.

Unfortunately, Moffett believes that NPV is "shockingly low" compared to what AT&T and Verizon enjoyed when they were gaining market share in the past three-to-four years, amid consumers' uptake of smartphone devices. Verizon's NPV of post-paid subscribers has been about $3,000, according to Moffett's calculations.

"Investors will have to bring their expectations for TMUS way up. But in the zero sum game of U.S. Wireless, they will also have to bring estimates for everyone else down. Way down," Moffett concludes.

Others agree. Citigroup credit analysts said on Tuesday they believe T-Mobile's credit metrics are in the process of improving.

"In less than 9 months, T-Mobile has transformed itself and had an impact on the US wireless industry. Pricing strategies and package changes are evident at each Big-4 wireless carrier. We expect more disruption in 2014," the analysts said.

Let's not forget how important credit metrics are to T-Mobile's market share grab.

As standalones, both T-Mobile and Sprint were seen as not having the money in the bank to invest in their nationwide data networks, and lay the foundation rising market shares at AT&T and Verizon. T-Mobile's acquisition of MetroPCS, however, was a bit of a recapitalization for the company and a deal that also bolstered its spectrum position.

The extent of T-Mobile's debt in the merger even proved a controversial point that drew vocal hedge fund investors out of the woodwork and a bit of jaw-boning between billionaire John Paulson and CEO John Legere. Those differences were eventually resolved, and in a seemingly productive manner.

If fact, T-Mobile's more flexible finances are driving a piece of the company's current market share grab. Jefferies analysts note T-Mobile's equipment installment plan (EIP), its novel financing mechanism for smartphone handsets, amounts to taking consumer debt onto the company's balance sheet. They believe that if T-Mobile over-burdens its balance sheet as it acquires customers or drains too much cash, it could securitize some accounts receivable balances.

Sprint's takeover by SoftBank was also a recapitalization of the struggling telecom, however, the company hasn't yet emerged as threat to AT&T and Verizon in the way that T-Mobile has.

Bottom Line: Last year, the telecom sector underwent a frenzy of consolidation. The match-making generally partnered carriers in a way that allowed them to invest heavily in acquiring customers and improving their service.

If that consolidation leads to the creation of four profitable nationwide carriers in AT&T, Verizon, Sprint and T-Mobile, it will have major ramifications for investors and the industry.

T-Mobile Earnings Signal Cracks in Telecom Duopoly

Verizon Playing Defense in $130 Billion Verizon Wireless Deal

-- Written by Antoine Gara in New York

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SYM TRADE IT LAST %CHG
S $5.02 0.00%
T $32.32 0.00%
TMUS $38.96 0.00%
VZ $44.90 0.00%
AAPL $107.72 0.00%

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