Don't underestimate T-Mobile U.S. (TMUS)
Over the past few years, the wireless carrier has added tens of millions of subscribers by driving down prices and coming up with innovative service plans in a U.S. market for which average monthly bills were much higher than those seen in similar markets in other developed countries.
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For that reason, the self-proclaimed Un-Carrier's plans to enter another big U.S. market for which average bills are a lot higher than in many comparable markets shouldn't be taken lightly -- even if that market's business dynamics present some unique challenges.
On Dec. 13, T-Mobile announced that it's buying Layer3 TV, an upstart TV and broadband service provider currently operating in L.A., Chicago, Washington D.C. and a handful of other cities. Terms were undisclosed, although T-Mobile said the deal won't impact previously-announced cash flow growth guidance.
Layer3's assets will be used to launch a T-Mobile-branded TV service in 2018. For now, the carrier is sharing few details about what the service will offer, or how it will be priced. CEO John Legere does promise that the service will let viewers watch "what you want, when you want, where you want," and be free of "complete bull----" such as service contracts and promotional prices that expire after 12 months.
COO Mike Sievert assures that T-Mobile's services will -- like existing Internet TV offerings -- run over any third-party broadband network. Layer3's existing services, by comparison, are only available in places where the company has struck a deal with a local ISP to provide a home fiber connection. Sievert also indicates that T-Mobile -- much like AT&T (T) with its DirecTV Now service -- wants to run targeted video ads against its content.
Notably, whereas many existing web TV services offer cheap-but-limited plans meant to appeal to cord-cutters -- Dish Network's (DISH) Sling TV features plans start at $20 per month, for example, while Alphabet/Google's (GOOGL) YouTube TV goes for just $35 per month -- T-Mobile suggests it wants to offer something similar to Layer3's existing Platinum allHD TV service. That service typically features 150-200 "unique" channels, one bundled set-top (additional boxes cost $10 per month) and 4K channels, all for about $75 per month (fees included).
Judging by its mobile track record, T-Mobile will look to undercut comparable plans from pay-TV incumbents, presumably via bundles covering postpaid wireless services and -- thanks to a recent deal between the companies -- included Netflix (NFLX) subscriptions. Indeed, Comcast (CMCSA) and Dish's shares sold off on Thursday following news of the Layer3 deal thanks to such concerns.
But undercutting rivals in pay-TV isn't as simple as it was until recently in wireless, where Verizon (VZ) and AT&T enjoyed fat margins and felt little competitive pressure for corporate and high-income subscribers. There, it wasn't hard to see how T-Mobile's discounting, when paired with edgy marketing, out-of-the-box service plans and needed 4G network investments, could provide a recipe for success.
To be sure, prices for traditional U.S. pay-TV subscription bundles aren't necessarily steep because pay-TV providers are enjoying giant margins on them; in many instances, they reap much higher margins on broadband services than on TV. They're steep because owners of the most popular TV networks, such as Disney (DIS) , Time Warner (TWX) and Viacom (VIA) , charge steep per-user affiliate fees for those networks, bundle those networks with many less-popular ones that feature their own affiliate fees and use the threat of pulling those networks (and thus creating a lot of irate pay-TV subscribers) to keep raising their rates.
And those higher rates, of course, wind up getting passed onto consumers via monthly bills.
T-Mobile will be facing this problem just as much as the incumbents have. Indeed, it might be an even larger problem for the company than for incumbents, given reports of TV network owners charging higher affiliate fees to web TV providers than to cable, satellite and telco clients. Perhaps T-Mobile can come up with a comprehensive TV package that's cheaper than the $75 per month currently charged by Layer3, but for now, one can't assume it will be far cheaper.
As noted earlier, however, T-Mobile has shown a knack for out-of-the-box thinking when it comes to service plans -- winning over customers not just by pricing its core voice and data services aggressively, but by taking aim at other sources of aggravation. Past examples include providing free or cheap global data roaming, leading the way in offering contract-free postpaid plans, rolling out cheap family plans, including taxes and fees within a listed service price and (through its Binge On service) preventing "DVD-quality" video streams from counting against data allotments.
And as Legere's comments indicate, T-Mobile will likely try to launch similar moves for its TV service. These include ones that other web TV providers have already carried out, such as baking in taxes and fees into prices, eliminating the need for set-top rentals by launching apps that run on streaming devices and game consoles, and bundling in a cloud DVR service.
Moreover, with T-Mobile expecting strong free cash flow (FCF) growth for its wireless operations, it could decide to offer its TV service at cost to wireless subs, who are already able to get bundled Netflix subscriptions. And just as T-Mobile's Netflix deal is believed to feature discounted subscription fees relative to Netflix's standard rates, T-Mobile could ink discounted deals with other online content providers, as well as with owners of niche TV channels that don't have the leverage to demand high affiliate fees. T-Mobile could also give subscribers of its standard unlimited data plan, which only comes with DVD-quality video streaming, free HD streams from its TV service.
In effect, such a strategy would be the opposite of what Dish and YouTube are trying to do. Instead of offering a cut-rate video service that isn't as good as what TV subs are used to getting, T-Mobile could try to offer something better and more comprehensive, while eliminating some traditional pain points.
One thing is for certain: Don't count on T-Mobile to follow conventional thinking as its TV service rolls out next year. The company will have its hands full trying to shake up an industry that has featured its own special brand of pretzel logic. But it has accomplished more than enough in recent years to warrant being taken seriously.
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