U.S. Telecoms Yahoo Deal a Warning for T-Mobile US

The purchase of Yahoo by U.S. telecommunications giant Verizon should sound alarm bells at German-owned rival T-Mobile US, Inc. The American market is nearing saturation, and it may need to diversify or merge to survive.
T-Mobile is the third biggest player in the U.S. mobile telecoms market.

The news of the tie-up continues to amaze: Verizon is buying Yahoo?

The merger of the biggest U.S. mobile communications player with the once renowned Internet portal seems strange. But there are good reasons for Verizon to make the move. The takeover is dirt-cheap and gives the mobile communications company huge amounts of client data for its digital advertising business. At least, that is the obvious motive.

But behind the scenes, there is more to it than meets the eye – something which has been bothering Verizon for some time now: worries about its core business.

The U.S. mobile communications market – the world’s biggest in terms of revenues – is approaching saturation point following many years of extraordinary growth. The takeover of Yahoo is a reaction to this. And it sends a signal that the executive board of Deutsche Telekom would also do well to note.

In one of the last high-price markets in the world, T-Mobile is playing with fire in the United States.

The Bonn-based telecoms company is currently very satisfied with its American subsidiary. T-Mobile US, Inc. continues to grow, has overtaken Sprint as number three and is being roundly praised for its success. The only question is: for how much longer?

The penetration level is high in the U.S. mobile communications market. Purely in terms of statistics, every U.S. household has 5.3 devices that can be connected to the internet. In other words, Americans have enough cellphones, tablets and smart radios. Whereas business with new contract customers in the United States constituted about a fifth of revenues in 2000, it is now approaching zero.

And there are now fewer reasons for consumers to buy a new smart phone. Some 84 percent of U.S. cellphone customers already have a high-tech device. And smart phone innovations are attracting fewer new customers with each new generation. Sure, maybe the camera is better or the screen bigger – but is that a reason to buy a new phone?

And then there is the increasingly cut-throat competition, which is causing Verizon headaches: In the first quarter of this year, the market leader lost 8,000 contract customers for mobile telecommunications, the operator’s bread-and-butter business. The company is compensating for this loss with tablet contracts which are selling well, but are not as lucrative as cellphones in terms of revenues and profit.

Many of the customers leaving Verizon are going to T-Mobile. This initially sounds like good news, but a closer look shows the flip side of this success. T-Mobile is gaining market share with spectacular offers like waiving international roaming fees and reimbursing costs of changing contract. These offers had a considerable impact for a long time, but new ideas, like distributing bonus shares, are no longer effective or original.

In the final analysis, these promotions are just price discounts. In one of the last high-price markets in the world, T-Mobile is playing with fire in the United States. The Seattle-based company has set a downward price spiral in motion, as shown by Sprint’s new offer. The competitor is promising to halve T-Mobile customers’ bills if they change to it.

Analysts estimate that T-Mobile has two to three years more growth in prospect in the United States. In that time it can increase its customer base from around 65 million currently to 75-80 million. That gives Deutsche Telekom time.  But T-Mobile will reach its limits, just like all the other players.

That's why it would be advisable for Telekom to plan the sale of its two-thirds share of T-Mobile US, Inc. sooner rather than later. But that is easier said than done. The market leaders Verizon and AT&T are out of the running as buyers for anti-trust reasons, and many other potential buyers do not have the money to buy a company with a stock exchange value of $37 billion (€33.6 billion).

In fact, the only conceivable candidate is Carlos Slim.  The Mexican billionaire is highly motivated and has a score to settle with former business partner AT&T. Mr. Slim owns TracFone, the fifth largest mobile communications company in the United States. That could be a good strategic mix with T-Mobile.

T-Mobile promotes itself in the United States as an “Un-Carrier.” This rebel image is embodied by chairman of the board John Legere, who likes to wear jeans and sneakers and heaps abuse on his competitors. But that wears off after a few years. Ironically, T-Mobile could soon be the remaining thoroughbred telecommunications player, with Verizon and AT&T venturing into other business areas.

A sale would draw a neat line under the risky and expensive takeover of Voicestream by Deutsche Telekom in 2001, and the company needs the billions a sale would generate for other markets. It must be nearly time for a call to Carlos Slim in Mexico City.

 

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