U.S. wireless carriers are preparing to roll out their 5G service to consumers, with faster speeds and greater capacity. While improved service might mean higher prices at AT&T (NYSE: T) or Verizon (NYSE: VZ), T-Mobile (NASDAQ: TMUS) has a much different philosophy.
At a recent investors conference, T-Mobile CFO Braxton Carter shared his perspective as to why it might be more beneficial for T-Mobile to keep 5G data prices similar to its 4G prices. He gave two reasons, which are really two sides of the same coin, and both have to do with scaling.
Lots of fixed costs in wireless
Building, operating, and maintaining a wireless network across the United States is extremely capital intensive. Those expenses show up in the difference between AT&T's and Verizon's wireless service EBITDA margins and T-Mobile's EBITDA margin. T-Mobile's margin was just 41% in the second quarter, compared with AT&T's 56% wireless service EBITDA margin.
AT&T's service margins aren't so much higher than T-Mobile's because it's any more efficient at building a wireless network and providing service. It's because AT&T has around twice as many subscribers. That scale provides leverage over the fixed costs and assets involved in operating a wireless network.
"When you do the financial analysis on it, you create much more terminal value by driving a generally stable ARPU [average revenue per user] -- which is what we've been doing and will continue to do -- versus going out and monetizing and charging more for data and having a lower growth trajectory," Carter said. "We're not interested in sacrificing future value creation for short-term gain of monetizing."
Even if and when T-Mobile's merger with Sprint (NYSE: S) closes, there's a lot of room to keep scaling. Carter pointed out that the switch to 5G could increase churn levels among wireless subscribers, which have sunk to historic lows over the last few years. But as consumers look for the best 5G network and the best value for their money, he sees an opportunity to start taking more customers from AT&T and Verizon and continue scaling the business.
A network capable of handling more subscribers
On the flip side of using scale to offset fixed costs is the idea that, in order to scale efficiently, the wireless network needs to be capable of handling those subscribers. "If you have the capacity, you are economically incented to fill that capacity," Carter said. "And if you don't have the capacity, you are economically incented to start monetizing, charging more as a demand suppressor."
New T-Mobile will have eight times the capacity of T-Mobile as a stand-alone company and 15 times the speed thanks to the additional wireless spectrum brought over from Sprint. Considering Sprint has even fewer subscribers than T-Mobile currently, there's a lot of capacity that'll go unused. So T-Mobile will be in a position to charge relatively little because its marginal cost of servicing the next subscriber is so low.
That's the core philosophy behind T-Mobile's plans to offer home broadband. In areas where it has a lot of excess capacity, it can offer home broadband at an extremely competitive price and still make it profitable because the marginal cost of the service is minimal. For reference, Verizon offers its 5G home internet service for $50 per month for wireless subscribers and $70 per month for non-subscribers. Those prices are also fairly competitive.
With the opportunity to continue scaling the business and the network capacity to more than handle increased scale, New T-Mobile should be expected to have 5G pricing that's fairly competitive. Over the long run, that should produce better EBITDA margins than simply trying to maximize revenue from the customers it already has.
10 stocks we like better than T-Mobile US
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and T-Mobile US wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 1, 2019
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.