Deutsche Telekom: Hello! Anyone Home?

Responding to widespread consumer sentiment, the FCC has opposed Deutsche Telekom's proposed sale of T-Mobile and its subsequent merger with ATT.  The FCC draft study released today forcefully rebuts all the benefits of the merger to US wireless services, consumer pricing, and job creation. 

I went to T-Mobile's IR site and looked over their recently reported fiscal third quarter results.  It's hard to imagine what management was thinking in their running of U.S. T-Mobile.  Overall, adjusted EBITDA for US operations increased 9.2%, which is nothing to sneeze at, and the adjusted operating margin was 27.8%.  Again, no alarm bells going off yet. 

However, the adjusted operating margin in the US compares to an operating margin of 41.5% in Germany and 36% in the rest of Europe.  One thing that jumps out notably is the investment and roll out of network investment and product innovation for German customers, essentially bringing multimedia services to smart phones and other devices.  It is very impressive, and probably accounts for revenue growth, subscriber growth and EBITDA margins in Germany and probably in Europe.

There has been essentially no such investment in the US T-Mobile network.  For full disclosure, I have been with T-Mobile as a personal customer for probably more than a decade.  I've also experienced ATT as a corporate customer a few times.  T-Mobile's early decision to build a GSM network seemed savvy to me, since it allowed a customer to be able to operate easily in Europe where GSM was the network choice, as opposed to ATT's original CDMA.  Rates per minute were always the best, and the customer service was top notch, miles ahead of any of our other providers.

T-Mobile poured millions into a wildly successful brand identity campaign with Catherine Zeta-Jones, but the campaign was focused solely on price, with no reference to the network or customer service.  One of the reasons was the DT was investing nothing in T-Mobile's network, which makes no sense.  For wireless, the network is the product.  Verizon, meanwhile, beat us to death with the "Can you hear me now?" 

Over the past five quarters, T-Mobile has had an exodus of contract customers, about 1.2 million customers lost.  But, what would one expect?  The announcement of the merger made it an open field for everyone, including the moribund Sprint to poach customers.  Plus, anyone who has dealt with ATT probably went to jump into the arms of Verizon.  So, the result shouldn't have been surprising.

On the other hand, over the same past five quarters, T-Mobile has added about 1.2 million pre-paid customers, which seem like they should be more profitable than some big users on T-Mobile data plans.  Overall, net adds were about zero for the trailing five quarters. 

US revenue for the fiscal third quarter was down to 3.7 billion euros from 4.1 billion euros in the prior year period.  Data network development expenditures by DT in the US had been flat at fairly low levels for the past five quarters.

Talking as I do with T-Mobile retailers and customer service people, you can feel the demoralizing effect of the proposed merger and the subsequent exodus of contract customers.  They were told to bombard existing customers with trade-up offers and useless text offers. It's not their fault, but the fault of poor management.

It appears during the entire tenure of DT's ownership of T-Mobile that it has been run in almost a harvesting mode.  This market is full of customers who are knowledgeable, demanding and sticky.  DT has made a mess of their investment, which is curious given their strong track record.  However, look at their competition in Europe.   That probably explains much of their monopoly-like 42% operating margins in Germany.

I hope that T-Mobile is not collateral damage in this tug of war with regulators about the ATT deal.