T-Mobile's margins collapse in third quarter; carrier is now dead last among the four U.S. majors

For some time, T-Mobile has been the tail wagging the dog in the industry. And while cutting prices and offering free music streaming helps the carrier's pro-customer image, the company is doing this at a financial price. The economic version of "there is no such thing as a free lunch" means that there are costs to lowering prices and giving away free data.

If you take a look at the charts below, which were produced by Jackdaw Research analyst Jan Dawson, you can see how T-Mobile's focus on the consumer is impacting their business. In the first quarter of 2013, T-Mobile had a drop in wireless revenue for the period. It was the only one of the four major stateside mobile operators to report a lower top-line for that three month period. Move ahead to the third quarter of 2014, and T-Mobile is leading the way in wireless revenue growth, followed by Verizon, AT&T and Sprint.

But here is the cost. By giving away data for tablets and streaming music, and in trying to be the low-cost provider, T-Mobile has seen a sharp drop in its profit margins. From the first quarter of 2012, a period that saw the carrier enjoy EBITDA profit margins of about 26%, T-Mobile has seen its profit margins decline to under 10%. Verizon, as a comparison, enjoys an EBITDA profit margin above 40%. And even financially struggling Sprint has seen this metric recently show an uptrend.

T-Mobile CEO John Legere has constantly pointed out the high profit margins at Verizon and AT&T as a sign that their prices are too high. The outspoken executive has also made it clear that he is focusing on revenue now, expecting that T-Mobile's margins will improve over time. And Legere could be right on. We could see T-Mobile jump over Sprint some time this month, to become the nation's third largest carrier. On Tuesday, we told you that Sprint had lost 272,000 post-paid customers in its fiscal second quarter, and it plans on cutting 2000 jobs.

Legere's strategy is not without risk. Stockholders, after all, have to eat and they have a very short-term focus. Lower profits usually mean a lower stock price. But T-Mobile's shares have been propped up by the constant rumors of a takeover. These rumors are giving John Legere the luxury of time to implement his plan. It should be interesting to see what happens in the wireless industry over the next five years.


source: DawsonResearch via FierceWireless