T-Mobile USA, the wireless company AT&T Inc. is trying to acquire, may lose three times the number of contract subscribers this year as in 2010 as the U.S. Justice Department’s attempt to stop the deal is hampering the company’s ability to cut prices and creating concerns among users.
The fourth-largest U.S. wireless operator will see the number of customers on monthly contracts decline by about 1.2 million, compared with a drop of 390,000 the year before, according to the average estimate of six analysts surveyed by Bloomberg. That would give the company 33.5 million total customers and 25.2 million contract subscribers by year’s end.
T-Mobile’s market share losses are being exacerbated because it’s refraining from the aggressive price cuts it has used in the past, said Craig Moffett, an analyst with Sanford C. Bernstein & Co. Though price cuts have helped the company attract customers in the past, they may now aid the Justice Department in making its case T-Mobile should remain independent because it helps suppress prices for consumers, he said.
“Cutting prices at this point would be very difficult because the DOJ has said their strategic importance stems from their role as a price cutter,” said Moffett.
The Justice Department sued in August to block AT&T’s proposed $39 billion takeover of T-Mobile, a unit of Deutsche Telekom AG, saying that such a deal would “remove a significant competitive force from the market.” AT&T said in a response last month that the deal would not inhibit competition and would allow the combined companies to offer high-speed wireless services more rapidly and broadly.
T-Mobile spokesman David Henderson declined to comment on the company’s pricing plans. Henderson said AT&T has promised to honor T-Mobile’s rate plans after the merger is completed.
The loss of 1.2 million contract, or postpaid, subscribers is based on estimates from analysts at Sanford C. Bernstein, UBS AG, JPMorgan Chase & Co., RBC Capital Markets, Hudson Square Research and Robert W. Baird & Co. The highest estimated loss is 1.39 million subscribers and the lowest is 965,000.
In the past, when T-Mobile wanted to draw customers, it would offer promotions like $40 a month for 1,000 minutes or one-day specials where every phone was free with a new contract, said Roger Entner, an analyst with Recon Analytics LLC. Without such deals, T-Mobile will struggle, especially because the company’s future is uncertain, he said.
“T-Mobile is already in a difficult spot from a consumer perspective,” Entner said in an interview. “People will ask themselves, ‘Am I really going to sign a two-year contract with a company that may be on life support if the deal doesn’t go through?’”
Advertising and Stores
T-Mobile is likely to gain prepaid customers, or those who pay month-to-month, this year, in part through offers such as a $30 a month plan for unlimited text messaging and Web access through Wal-Mart Stores Inc.
Still, such customers, who don’t agree to long-term contracts, are less profitable than contract customers and T-Mobile is unlikely to attract enough of them to boost the total number of customers, according to Nick Lyall, an analyst with UBS. He estimates the company will lose a net 250,000 subscribers, including prepaid and contract customers, this year, compared with 56,000 last year.
T-Mobile, which also will be the only major U.S. carrier without Apple Inc.’s iPhone after Sprint Nextel Corp. begins selling the device this month, is investing in marketing and store improvements. The company spent $115 million in the second quarter, compared with $111 million in the first, according to Kantar Media, a company that analyzes ad spending. In the same period, AT&T decreased spending on wireless ads to $356 million from $468 million, Kantar said.
“Suddenly you’re seeing T-Mobile advertising everywhere you look,” said Moffett.
Last week, T-Mobile also said it was remodeling nearly 400 stores in an effort to boost sales and improve the customer experience. The first remodeled stores opened in Boston and Washington this week, the company said.
T-Mobile does have wireless service plans that are less expensive than its largest rivals. In some of its major markets, T-Mobile, for example, charges $80 a month for its unlimited data, text and calling plan, while AT&T gets about $115 for a comparable offering. Still, T-Mobile may not be as aggressive with its pricing as it has been in the past, said Michael Cote, whose consulting firm Cote Collaborative Inc. has advised U.S. handset makers and wireless operators.
“They’re a bit hand-tied on pricing because they need to show the DOJ that the pricing gap isn’t that big,” Cote said in an interview.
AT&T rose 3 cents to $28.44 at the close in New York and has dropped 3.2 percent this year. Deutsche Telekom lost 17 cents to 9.07 euros in Frankfurt trading and has lost 6.1 percent this year.