After being a T-Mobile (NASDAQ:TMUS) bull for three years, I became a bear in a single day on November 10th, 2015, the day of Un-Carrier X. Binge On, as it is also called, offers T-Mobile subscribers who buy any expanded data package un-metered video streaming from all participating content providers, in exchange for accepting a lower bit-rate, 480p resolution stream instead of the higher 1080p. Since that time, I have written a number of articles explaining my thesis that T-Mobile's network cannot handle the data demands that will be placed upon it by this new non-metered video service.
However, Binge On has received almost universally positive reviews so far from both technical and financial analysts, who anticipate a new source of subscriber additions at little extra cost to the network. And the early results of Binge On have largely borne out their views. The purpose of this article is to explain why appearances, in this case, are deceiving. I reiterate once again my bearish view on T-Mobile and Binge On.
Image Source: T-Mobile
There has been a lot of push back against my position, from some very smart people. In addition to the usual arguments that T-Mobile knows its own network better than I do, which is certainly true, one additional point that has been made to me numerous times is that my thesis may already be out of date. Numerous reports have claimed that Binge On has already proven to be a smashing success, including T-Mobile itself going so far as to claim that Binge On has actually reduced strain on the network. That's par for the course for T-Mobile, which has been eager to rebut any claims that Binge On is too much for them. Their biggest rebuttal probably came just a few weeks after announcing it, when T-Mobile gave all existing subscribers three free months of unlimited data as a Christmas present, as long as they kept Binge On switched on.
So, if the network can take the strain of giving unlimited to everyone, it must be in great shape, no?
No. There are three reasons to think that there are a few chapters left to this story.
First, T-Mobile's positive reports about the early impact of Binge On on their network need to be read in light of the fact that the structure of Binge On almost guarantees that it will appear to succeed for the first few months. To understand why, remember how the program actually works. T-Mobile installs hardware/software that detects a video stream passing over their data network and automatically downgrades the bit rate to that sufficient for a 480p stream. It then removes the bandwidth used during the stream from the count of monthly data used.
Various estimates exist for how much throughput this saves. T-Mobile itself initially claimed that 1080p required 2.2X more data than 480p, but a short while later it contradicted itself when it said that Binge On would allow people to consume "triple" the video. 3X corresponded to my own estimates, but some have claimed the real number is actually 4X.
The impact of this on the network obviously depends on how much extra video streaming people do because of Binge On, and how much of that usage occurs during peak hours. But, in the race between T-Mobile and video streamers, T-Mobile has a huge head start. Before a single person increases their video streaming because of Binge On, all the existing video streams that were going through their network on November 10th instantly become only 1/3-1/4 the size they were before on November 9th.
With video constituting around 60% of mobile traffic, one would expect this to produce a measurable improvement in network capacity, at least at first. The problem with this is that it's strictly a one-time benefit. Meanwhile, the extra video traffic Binge On produces from newly liberated customers increases gradually over time, as more people take advantage of it more often and as T-Mobile's mix of subscribers shifts. After Binge On was announced it became far more likely that any heavy video consumers on competing wireless carriers would choose T-Mobile as their new provider over competitors like AT&T (NYSE:T) and Verizon (NYSE:VZ), who still cap video streaming at levels hard-core streamers find far too low.
Secondly, it should not be assumed that confidence motivated T-Mobile's offer. It's just as plausible to think fear, or at least trepidation, motivated it. When T-Mobile launched Binge On, it included 24 streaming services, including such mainstays as Netflix (NASDAQ:NFLX) and Hulu. Amazon (NASDAQ:AMZN) Video was added a little while later. But one big name was missing: Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) YouTube. T-Mobile's explanation was that YouTube did not quite meet their technical specifications, since Binge On needs a 100% accurate method of determining if a stream is video in order to function. They promised that they were working on it and hoped to have YouTube on the program soon.
That wasn't good enough for Alphabet, who objected that Binge On violated net neutrality because it moved all video streaming into the 480p standard, even that from non-participating providers such as YouTube. T-Mobile's reply, that subscribers had the option to disable the feature, didn't satisfy them. They also pointed out that Binge On degraded all video traffic on all data plans, even those on the basic T-Mobile plan who hadn't purchased extra data and therefore were not receiving the benefit of their video usage being un-metered. Alphabet argued the program should be opt-in, not opt-out, insisting net neutrality rules prohibited T-Mobile from reducing anyone's bit rate without their explicit consent. They threatened to file with the FCC.
Permit me to posit a scenario, one which seems to me no less plausible than a multi-billion dollar company handing out spontaneous Christmas gifts. So, T-Mobile was being threatened with litigation. Then it remembered it had a lot of surplus in the network at the moment. And its brilliant "Christmas present" was born. The unlimited data offer essentially punted any potential litigation or FCC hearings for three months. Since keeping Binge On was the only requirement, every video service was essentially un-metered for three months, even YouTube and other non-participants. The only subscribers who didn't get the benefit were those who disabled Binge On, and they obviously couldn't complain the program was hurting them. No harm meant no foul, meant, T-Mobile hoped, no hearings.
Without being a fly on the wall in the room when Legere approved the unlimited data, of course, I cannot prove that this was what he was thinking when it happened. But it makes sense, and even if it wasn't his sole motivation, I would guess that he was at the very least aware that this would be an important side benefit.
Meanwhile, negotiations were underway. When Alphabet made it clear that it wanted changes before it would drop its objections, and its threats, T-Mobile started making concessions. Just a few weeks after the unlimited data special ran out, T-Mobile announced that it had reached agreement with Alphabet on all outstanding issues, bringing YouTube into Binge On and alleviating Alphabet's concerns about net neutrality. Legere had agreed to almost all Alphabet's conditions, including giving video providers themselves access to Binge On's protocols so they could optimize their video streams directly, rather than through T-Mobile, as well as making it easier for subscribers to enable and disable Binge On completely. In addition, video providers themselves will now also be able to disable Binge On if they choose not to participate in the program and return to full streams. Previously, all video streams were downgraded automatically regardless of whether or not the provider was a participant.
Nothing For Something
With YouTube being far and away the most popular video service on mobile devices - data caps have pushed subscribers towards short-form content instead of full movies and TV episodes from Netflix and others - T-Mobile probably felt that they needed to get YouTube on board. But while that was probably true, it is also the third reason that Binge On's ultimate impact on T-Mobile is yet to be determined.
YouTube may be harder than the other services for T-Mobile's network to absorb, for two reasons. The first is simply, as I said, that it's bigger. But the other reason is that, when it comes to Binge On, YouTube gets but it doesn't really give. Netflix, Hulu, HBO and the other providers on Binge On are mostly providers of professional content. Content by paid thespians, directors, and camera operators which is usually available in 1080p, and was being streamed in 1080p before Binge On debuted. YouTube, on the other hand, is the ultimate amateur video platform. And while some of its content is professional and could be viewed in 1080p, a lot of YouTube's video was uploaded in 480p to begin with, and 480p is the default setting for most YouTube videos.
What's more, YouTube itself was already practicing data management, unlike some of the other providers. Stream a video on the YouTube iPhone app and hit settings, and resolution gives you four options: 144p, 240p, 360p, and 480p. In other words, the highest resolution available is the Binge On resolution anyway. The iPad app is capable of higher resolutions, and there may be a way to hack higher bit rates on the iPhone or Android as well, but the vast majority of YouTube content is probably going to keep coming in exactly the way it was before. That means that the benefit to T-Mobile's network of adding YouTube to Binge On will be minimal. On a lot of videos, there is no downgrading to be done.
The end of the YouTube-Binge On saga was probably inevitable, given that neither the most popular mobile video service nor the only real un-metered mobile video offering could really afford to ignore the other. But it is still significant that for T-Mobile, at least, most all of the good news from Binge On for its network is already in, while most of the bad news is still gathering on the horizon.
While I am fully cognizant of being part of a dwindling minority, I remain deeply skeptical of T-Mobile's ability to maintain network performance and price competitiveness under the strain of Binge On. I do not believe its stock is a buy under these circumstances. But without knowing exactly when the network pressure will reach a breaking point, shorting it would also be dangerous. For now, I recommend just avoiding the stock altogether.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.