Photo Credit: T-Mobile USA
T-Mobile announced, Tuesday, the formalization of a deal to merge with Metro PCS. The deal is still subject to regulatory approval, but is unlikely to face too much objection. Ever since the FCC and DOJ combined to block AT&T’s merger with T-Mobile USA last year T-Mobile has been viewed a little bit of a lame duck in the industry, garnering little in the way of investment from its parent company Deutsche Telekom while hemorrhaging customers over the past year to the other 3 networks.
Metro PCS conversely, with its expanding footprint and customer base in the no contract space (where most of the acquisition growth in the industry is), was viewed as a prime industry takeover target, albeit one whose network was starting to show signs of creaking under the strain of smartphone adoption. Sprint-Nextel, the previous frontrunner, saw its share price tumble on the news, especially since Sprint-Nextel’s and Metro’s networks were the most compatible. The marriage of the two looks set to create, on paper at least a viable 4th player in the market with around 42m customers.
Metro PCS and T-Mobile USA announced that they will both continue to operate as customer facing brands under the T-Mobile parent name. Their propositions, on the face of it, look perfectly set up to position the new entity as the crossover brand in the industry – the lower end contract customer meets the higher expectation having no contract customer. This solves a problem for T-Mobile because they never really looked like they wanted to be in the no contract business anyway. The margins are smaller, revenue less predictable, their contract brand gets tarnished and the distribution footprint required is fundamentally different. They buried their no contract offer in all communications and it only really gained traction because their master brand became tarnished enough for people to decide between a contract or no contract from T-Mobile.
Metro PCS conversely is very happy in the no contract space. It stacks them high and sells them cheap and has done very well with a particular affinity amongst a pragmatic group of cost conscious and predictability focused customers. T-Mobile, the parent may even be excited by the idea of having a place to send low value customers while Metro may possibly be encouraged to up sell some of their own customers into a T-Mobile contract.
In short, you can see why they did it.
So where’s the problem?
The problem is the customer. Traditional wisdom was that people went no contract because they couldn’t get credit and thus couldn’t get a contract. Companies like AT&T and Verizon even started pre pay or no contract brands to catch the almost 40% of applicants who fell into that bracket. But this is changing.
Now there is increasingly attrition from post paid to no contract driven not solely by economic hardship but by a desire to find a smarter and more predictable monthly payment without too much of a drop off in terms of quality.
T-Mobile is either going to have to retain their no contract offer, which will be duplicative and expensive, or try and migrate their customers to the Metro solution. They can overcome a number of issues via intelligent integration of their distribution, but the attitudinal differences and perception of a quality drop off between T-Mobile and Metro may cause many of their pre pay or no contract customers to go elsewhere which may make the deal less impactful than they may think.
Metro, also may not want some of the lower value customers that T-Mobile will try to send them and will try to usher them elsewhere – further exacerbating the frustration of a customer base still reeling from 2011’s failed merger. What T-Mobile may quickly find is that it is their disenfranchised contract customers that now walk into the waiting arms of Metro PCS. While that may be preferable to losing them to their post paid competitors, it is rarely a good idea to voluntarily lower the barriers to exit for customers when your company is failing.
The differences between these two companies are at the same time paper-thin (the width of a contract) and cavernous when it comes to customer profile. If this is a merger predicated on cross selling and upselling, then I’m afraid they are likely way off base. If it is built on consolidating and creating stability for two companies headed in different directions, then it might just work. Regardless, the industry now has a 4th competitor and the FCC will likely see that as a good thing. Whether that 4th player is able to deliver effectively for their customer is another thing entirely.
Hugh Tallents is a Senior Director of Strategy at Interbrand New York.
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