T-Mobile's (TMUS) 'Un-Carrier' Plan Could Pressure Industry Margins, Jefferies Says

December 27, 2013 1:39 PM EST
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While consolidation was a key theme in the telecom sector in 2013, next year the sector could be greeted with something much less pleasant - a pricing war. Jefferies telecom Mike McCormack is concerned that if T-Mobile's (NYSE: TMUS) "Un-Carrier" 4.0 offer does indeed target early termination fee (ETF) in exchange for switching to T-Mobile, "the plan and competitive responses to it will pressure industry margins."

"We believe that T-Mobile could be opening a Pandora's box, leading to intensified competition from larger peers that have better scale and higher profitability," McCormack said. "Though M&A has clouded fundamental analysis, we caution investors that continued actions by T-Mobile are likely to weaken industry trends."

Jefferies said the near-term impact on T-Mobile will be limited as the company will be able to recapture most or all of the cost of the ETF credit by selling the traded-in device on the secondary market, or by refurbishing and selling it to its upgrading customers. That said, long-term concerns are abound.

"While the promotions have little negative near-term financial impact to T-Mobile, and the company would be attracting higher quality customers, we believe the company is opening a Pandora’s box with respect to competition," the analyst said. "T-Mobile has benefitted from little competition from a dormant Sprint (NYSE: S), has seen limited response from AT&T (NYSE: T) and almost no response from Verizon (NYSE: VZ). Given that the company is targeting AT&T and Verizon's core customer base, we would expect a material response from the two (most likely increasing the ETF penalty). Once the two respond, we are concerned that T-Mobile could be placed in a circular situation and be forced to lower its service pricing again to attract customers, further pressuring the company’s disadvantaged margins."

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