T-Mobile USA Seeks to Ride Beefed Up Network, May Need Partners

Deutsche Telekom AG’s slow build-out of its T-Mobile USA network, once a shortcoming, may be turning into an advantage for Europe’s largest phone company.

The unit, the fourth-largest mobile-phone operator in the U.S. after Verizon Wireless, AT&T Inc. and Sprint Nextel Corp., accounts for about a quarter of the German company’s sales and has seen profit slide as it missed out on Apple Inc. iPhones. With the emergence of Google Inc.’s Android software, the lower- priced handset market targeted by T-Mobile is growing fast.

“The irony is that being late to the party means they are entering the party at just the right time for them,” said Robin Bienenstock, an analyst with Sanford C. Bernstein in London with an “outperform” rating on Deutsche Telekom shares. “They’re late because historically they underinvested and that in turn forced them into being a cheap and cheerful discounter.”

Deutsche Telekom Chief Executive Officer Rene Obermann and T-Mobile CEO Philipp Humm must demonstrate they can retain customers and boost revenue and profit, analysts said. The executives will unveil their strategy for the U.S. market in New York tomorrow and need to show that they’re prepared to buy or partner with a rival by next year to get spectrum to build a next generation network, called 4G or Long-Term Evolution.

“They might not need LTE to cater to capacity and speed before 2013, but in 2012 they will face a marketing challenge,” said Ameet Shah, a director at consulting firm PRTM in London.

Verizon Wireless activated its LTE service last month, while AT&T expects to start selling faster speed LTE services this year. T-Mobile won’t want to be left behind, he said.

Falling Behind

“Consumers will want the latest devices, on the fastest network, and getting them to sign up for 18- to 24-month contracts in 2012 will be hard when Verizon has its new network up and running,” Shah said.

T-Mobile USA, which doesn’t offer iPhones in the U.S., saw annual customer growth slow to 10 percent from more than 40 percent between 2002 and 2008. In 2009, it had a 3.2 percent net new customers and the share of high-margin customers slipped to 79 percent from 89 percent in 2003.

Shares of Deutsche Telekom, based in Bonn, fell 6.2 percent last year. They slid 0.2 percent to 9.59 euros as of 10:35 a.m. in Frankfurt.

T-Mobile USA sales fell 1.6 percent to $21.5 billion in 2009, while operating income before interest, depreciation and amortization fell 3.4 percent to $5.92 billion. In the quarter ended September, revenue at the unit fell 0.6 percent at $5.35 billion and Oibda slid 15 percent. Bienenstock sees T-Mobile USA sales rising between zero and 1 percent this year.

Catching Up

“We currently have the fastest network there,” CEO Obermann said in an interview with newspaper Bild am Sonntag on Jan. 15. “But we also need aggressive marketing and a very customer-friendly price policy. We need to sharpen our arguments for why customers should come to us and stay with us.”

Since 2008, T-Mobile has struggled to catch up with rivals on coverage. It spent more than $9 billion to expand its 3G network and update the speed to so-called HSPA+.

It expanded its smartphone line-up, with 41 percent of them now running on Android, according to Mark Donovan, senior vice president for mobile at researcher ComScore Inc.

“They’ve really pushed hard to bring smartphones to the masses,” said Donovan from Reston, Virginia. “They’ve also been very aggressive on pricing of data.”

According to eMarketer, Android surpassed Apple in November to become the second-largest smartphone platform in the U.S. after Research In Motion Ltd.’s BlackBerry. Apple came in third. The number of U.S. smartphone users is expected to increase to 84.4 million in 2012 from 60.2 million in 2010.

Partner Needed

T-Mobile will eventually need more spectrum, said Daniel Hays, a partner at PRTM in Washington. Its current network can support growth into 2012 and 2013 and has allowed T-Mobile USA “to have a credible data offering without having to rush into the arms of a potential partner,” he said.

Among them are Clearwire Corp., majority-owned by Sprint, and billionaire Philip Falcone’s wireless communications venture LightSquared Inc., which need to sell spectrum or find partners to build a next generation network on their frequencies.

Clearwire is struggling to raise funds as it loses support from Sprint. Meanwhile, LightSquared is racing to fulfil an accord reached with the U.S. Federal Communications Commission to employ a combination satellite-terrestrial network for 100 million Americans by the end of 2012 and 260 million by 2016.

Cheap Spectrum

That pressure may make spectrum available to T-Mobile at a discount, Bernstein’s Bienenstock said.

Clearwire may seek to sell assets, including some spectrum, spokesman Mike Digioia said. “We have talked to T-Mobile in the past,” he said. LightSquared spokeswoman Blair Kutrow declined to comment on potential partners.

Sprint’s 900 Mhz spectrum may be “a lot more complementary” for T-Mobile USA, Bienenstock said. Cristi Allen, a Sprint spokeswoman, declined to comment.

For now, Deutsche Telekom says it’s not interested. Last week, Chief Financial Officer Timotheus Hoettges reiterated that the company isn’t looking for large acquisitions. It has said if it had to go it alone, it could.

Bienenstock isn’t convinced. “I think they’re going to talk to Sprint this year,” she said.

To contact the reporter on this story: Ragnhild Kjetland in Frankfurt at rkjetland@bloomberg.net

To contact the editor responsible for this story: Vidya Root at vroot@bloomberg.net

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