T-Mobile Q1 customer additions halved

T-Mobile USA saw its customer growth cut in half in the first quarter as it continues to feel the squeeze from low-cost operators eating into its traditional customer base. While the economy was in part to blame, Analysts placed much of the blame on Sprint’s prepaid arm Boost Mobile, which launched a $50 a month unlimited service plan in January, which all operators—but particularly T-Mobile are struggling to counter.

T-Mobile’s net additions came in at 415,000 in the first quarter, down from 981,000 a year and from 621,000 in the fourth quarter. The revenue T-Mobile took in for Deutsche Telekom rose 20% year-over-year, but only accounting for the growing strength of the dollar relative the euro. In dollar terms, revenue increased only 4% to $5.3 billion. Average revenue per subscriber (ARPU) fell $3 to $53 a month over the same period, which Deutsche Telekom ascribed to lower minute usage each month, falling roaming charge revenue and a growing shift in T-Mobile’s customer mix to prepaid. Last quarter, 60% of its subscriber additions were prepaid users, up from 57% in the fourth quarter and only 25% in the first quarter of 2008.

With the economy forcing wireless users to cut costs, T-Mobile's incremental growth is clearly being driven by prepaid. But it’s exactly in prepaid where the biggest price completion lies, said Craig Moffett, senior analyst at Bernstein Research. According to Moffett, T-Mobile saw its customer retention costs skyrocket 64% over the last year. Though overall customer churn fell slightly from 2.4% to 2.3% quarter-over-quarter, churn of high-value contract customers, which could be the first evidence of the mass customer migration from postpaid to prepaid for which the industry has been bracing, Moffett said.

The key factor is price, and T-Mobile is facing enormous pressure from Boost’s $50 plan as well as budget services from MetroPCS and Leap Wireless. T-Mobile countered in March with its own $50 plan but only for customers who had been with operator for 22 months or more. While Deutsche Telekom indicated that T-Mobile would have to be more aggressive on price going forward, the operator made no indication it would extend the $50 plan to all customers.

“We believe T-Mobile will have no choice but to match the new $50 level going forward – being priced twice as high as the market is not a viable strategy,” Moffett said in a research note. “And when that happens, the competitive dynamic of the unlimited pre-paid segment will be exactly where it was a few quarters ago … but with a lower price point. Whatever momentum Sprint has gained as a result of its Boost Unlimited offering will become much more challenging to maintain beyond that point.”

T-Mobile remains stuck in the middle between operators targeting the high-end and operators targeting the low. The result is T-Mobile is getting squeezed. “Verizon Wireless and AT&T Mobility have historically dominated the higher-end, retail post-pay subscriber bases, while T-Mobile USA has generally been seen as a lower-cost provider on the post-pay side,” said Chris King, Stifel Nicolaus wireless analyst. “However that appears to be getting pinched due to the aggressive price competition from pre-paid carriers in the current environment.”

The beneficiary of these price wars will most likely be Sprint, which traditionally been the victim of other operators competitive pressures. Stifel projects that Boost will gain 600,000 subs in the first quarter due to its new $50 plan. Meanwhile other prepaid operators such as MVNO Tracfone will likely see better than average subscriber gains.