T-Mobile (TMUS) is rolling out a new program on July 14 that will take the carrier industry by storm. The company with its Jump! program will permit T-Mobile customers to upgrade to new devices twice a year rather than once every two years. For $10 a month, customers who enroll in the program have the option to upgrade their phone device twice a year, beginning six months after they enroll.
T-Mobile put an end to carrier subsidies with their "uncarrier" approach to cellular service plans earlier this year. Many other carriers have had to respond with big discounts and special plans in order to catch up and compete. Just several days ago, Sprint cut its prices on unlimited plans and pressure has been building on other carriers to follow.
T-Mobile's approach seems to be working and consumers have responded positively. According to Bloomberg, after three years of losing customers, T-Mobile finally gained subscribers in the latest quarter. In addition to Jump!, T-Mobile announced that its 4G LTE network now reaches 157 million people and is live in 116 metropolitan areas. The company debuted 4G LTE less than four months ago, and remains on target to deliver nationwide 4G LTE network coverage by the end of the year, reaching 200 million people in more than 200 metropolitan areas.
What this means for carriers
In essence, T-Mobile just declared a price war on the three other major carriers, Sprint (S), AT&T (T) and Verizon (VZ). The implications of T-Mobile's plan to gain customers will have significant implications to carriers who have not yet adapted to this new trend, or will not adapt to it fast enough. The new trend being that more and more people are responding positively to a no frills plan, with no long-term contract and a lower monthly bill, providing they pay for their device.
More or less this is nothing different than what is going on in the rest of the world. More and more people around the world are buying their devices for cash and use the cheapest carrier service possible. The U.S. is going in the same direction and eventually more and more consumers will have carrier service with no contract at all.
On Friday all major carriers trended lower, with Sprint in a free-fall, closing down by more than 7.5%. I think that eventually all major carriers will be impacted negatively by T-Mobile's new competitive approach. Both margins and revenue will be impacted and all major carriers will feel the pinch. As such, I either recommend selling all the major carriers, or selling them short if you get confirmation of technical weakness.
On the other hand, T-Mobile might benefit because it has already been coping with lower margins and has bleeding customers for several years now. So they have adapted to the new model and will probably be the main beneficiaries.
Will device makers be affected?
As for device makers, the current trend is that consumers are buying lower priced devices. This is one of the reasons why Apple's (AAPL) stock is having such a hard time. If subsidies -- as a result of this price war that T-Mobile started -- will be reduced or gone away with, the device makers that have most to lose will be the high-end device makers. I think the bells are tolling mostly for Apple and Samsung (GM:SSNLF).
In fact for Apple even more so, because to date Apple still has not rolled out a lower priced device to compete for those consumers that either can't afford a high-end smartphone (like the Apple iPhone 5 or the Samsung Galaxy S4) or don't want to spend all that money on a smartphone device anyway.
On the bright side, Nokia (NOK) and BlackBerry (BBRY) have many lower priced devices and already sell and compete in many countries around the world where consumers pay for their devices in cash. So as far as the rest of the world, Nokia and BlackBerry will not be affected.
In developed markets, however (such as the U.S.), Nokia and BlackBerry will be also be impacted. According to the NPD Group, in the first quarter of 2013, y-o-y total smartphone sales increased 42 percent, with one-third (36 percent) of the actual unit volume increase represented by prepaid smartphone sales. Prepaid means without a contract, or the business model that T-Mobile is pursuing.
But I think Nokia will be impacted more than BlackBerry. BlackBerry is also an enterprise device that Nokia is not. So while individuals might not buy a Lumia 920 because of the cost, corporations are not as price sensitive.
There is a bright side for device makers however. Because consumers will have the option to upgrade devices every six months (and I am sure almost all of them will exercise this option), it means more sales for all device makers. Yes margins will fall, but device makers will probably make up for lost profits from increased device sales. In other words, there will be more smartphone churning.
And because of this high churning, it will also be interesting to see how consumers respond to device trends. For example, let's say you buy a Nokia Lumia 920 but don't like it all that much. After six months you can upgrade to a BlackBerry Z10 to try it out. So I also think it will be an opportunity for BlackBerry, that has the lowest penetration today, to prove itself, since more and more people in the future will have a chance to try out BlackBerry devices, whereas today most would not even contemplate of buying one.
T-Mobile's aggressive stance in the space will lower margins and EPS for all major carriers. As such and as a precaution, I advise selling all three major carriers, Sprint, AT&T and Verizon. I think once the market models in the repercussions of T-Mobile's aggressive strategy, we will see downgrades in the sector across the board. On the other hand, I think T-Mobile will benefit.
As for device makers, I think they will also be affected, with Apple and Samsung more than Nokia and BlackBerry. As for Google (GOOG), for the time being they are too small of a device maker to make a difference. However, I think they have the chance to adapt better than most, so I think they might actually benefit as a result also.
But in order for us to be able to get a handle on the repercussions of T-Mobile's strategy, several months have to go by. In the mean time, it will be interesting to see how the major mobile carriers adapt to this new wave of competitive pressure from T-Mobile and what counter-measure they will take.