Original title: "We started out just to alleviate customer pain points, but unexpectedly changed the entire industry": the 5G battlefield of the three giants of american telecommunications
Author | Fusu
Edit | Little white
Fast food, a word that people love and hate.
5G is an area that mobile operators have focused on in recent years.
T-Mobile US(TMUS. US) ("T-Mobile", "The Company") is the leading 5G operator in the United States.
In terms of coverage area, the company's 5G network is nearly 5 times that of rival Verizon (VZ.N) and nearly 2 times that of AT&T (T.N), covering 94% of the nation's network.
(Source: FY2021 Press Release)
BOTH AT&T and Verizon are currently companies with annual revenues of more than $100 billion.
Although T-Mobile has the smallest revenue scale among the big three, it is arguably the most growing of the large mobile operators in the United States.
In April 2020, T-Mobile acquired Sprint, the nation's fourth-largest carrier, for $26.5 billion in equity consideration. As a result of the consolidation, the company's revenue surged 52% year-on-year to $68 billion.
In 2021, even after last year's high base, T-Mobile's revenue increased by 17.1% year-on-year to $80 billion, higher than AT&T (YoY: -1.7%) and Verizon (YoY: 4.1%) in the same period.
Over the past 10 years, T-Mobile has first surpassed Sprint, rising from fourth to third among the large U.S. mobile operators, and then acquiring the competitor in one fell swoop, forming a situation in which the U.S. telecommunications service industry is now "three-legged."
The old iron must be curious about T-Mobile's "ascension journey"?
And look at the secrets of the stormtrooper.
"No carrier" strategy: saved the company and changed the industry
(1) At one point, the performance was unfavorable, and the insurance was acquired by AT&T
Unlike AT&T and Verizon, which are native to the United States, T-Mobile is a subsidiary of DTE.DE, Europe's largest mobile operator.
At present, Deutsche Telekom remains the company's largest shareholder, holding 46.8%; SoftBank Group (9984. T) is the second largest shareholder, holding 4.9% of the shares.
Under the agreement, Deutsche Telekom has voting rights in SoftBank's shares, giving it control over the company.
(Source: MarketScreener)
The rapid rise of T-Mobile has disrupted the U.S. telecom services landscape, which has long been dominated by AT&T and Verizon.
However, before 2013, the company's performance was rather dismal.
(Source: Statista)
The company was in a tough competitive position, with three larger mobile operators, AT&T, Verizon and Sprint, and a number of smaller operators known as Mobile virtual network operators (MVNOs).
MVNO usually does not have its own infrastructure, but instead wholesales bandwidth from large operators and sells it to users at retail prices. Although such small operators can only provide lower priorities, they are cheaper than they are, so they also attract many users.
As the weakest of the four major mobile operators, coupled with years of poor performance, the company has become an ideal acquisition target for large competitors.
In 2011, parent company Deutsche Telekom also couldn't hold back and began talks with potential buyer AT&T for a $39 billion sale.
The deal, which both sides intended to reach, failed to obtain approval from the U.S. antitrust authorities.
Although the sale failed, the company made a "windfall": Under the agreement, AT&T would have to pay the company $3 billion in cash and some spectrum assets as compensation.
Even though the cash flow situation has eased significantly, the company's performance has not improved.
In 2012, the company's revenue was less than $20 billion, and a goodwill impairment of $3.9 billion and $2.5 billion in intangible assets related to spectrum licenses resulted in a net loss of $7.3 billion for the year.
(ii) The "no-operator" strategy to reverse fate
In 2013, the company's newly appointed CEO, John Legere, decided to turn the tide.
（John Legere）
Fortunately, at that time, the market environment of the US telecommunications service industry was generally unfriendly to users, which gave the company the opportunity to "counterattack".
At that time, it was industry practice for mobile operators to require users to sign a two-year mandatory contract, and if the user terminated the contract early, a fine of not low price would be charged.
In-package traffic that operators offer to users is usually very limited, and the charges for excess traffic are quite expensive.
Equipment installment plans provided by operators to users, which usually require binding to mandatory contracts;
In addition, the price paid in installments usually ends up far exceeding the market value of the phone.
In March 2013, the company launched a new strategy called "Un-carrier."
As the name suggests, the aim is to differentiate the company from other operators and see addressing user pain points at the heart of the strategy.
The most significant change in the "operator-free" strategy is the elimination of mandatory contracting, an industry practice.
This means that even if users start using T-Mobile's services this month and then move to other carriers like AT&T or Verizon next month, they will only have to pay the company for the month without any penalties.
Subsequently, the company continued to upgrade its "no operator" strategy and launched more preferential schemes. Like what:
Device installment payments do not need to be tied to a package and allow users to settle in advance at any time;
Free international roaming charges;
WIFI free calling;
Some music apps are free of traffic;
Monthly unused traffic is not zero, can be rolled over to one year...
These strategies may not seem new to today's consumers, but at the time, many of them were pioneered by companies and were the only ones offered by large operators.
In order to solve the user's pain points, the company even launched a preferential scheme that directly hit the key points of competitors: the company will pay a "penalty" for early termination of the contract for users who have transferred from other operators.
That said, even if a user's contract with another carrier hasn't expired, if you want to become a T-Mobile user, no problem — the company will compensate these users for up to $350.
The company's "no operator" strategy has borne fruit quickly, and since 2013, the company's revenue has changed from the previous downward trend of consecutive years, and customers have also ushered in a substantial increase.
In just three years (2013-2015), the company's market share soared from 10% to 17%, surpassing Sprint to become the third-largest operator in the United States in 2015.
During this period, with the exception of AT&T's slight increase in market share, both Verizon and Sprint saw their market share decline.
(Source: 451 Research)
The "no-carrier" strategy saved the company from its previous decline, and many of the measures it began with were increasingly emulated by more and more operators, changing many of the past practices in the U.S. communications service industry.
As the company puts it, "We started out to alleviate our customers' pain points, but the result is a forever change for the wireless industry." ”
The history of T-Mobile's ascension to the throne can't help but be reminiscent of the market capitalization in the era of the registration system.
The market value storm is also to solve the user's pain points as the core of the product.
The past era of approval system formed the "all-market seller" model. However, in the era of the registration system, investors are faced with the dual risks of a large number of listed companies, and the risk of delisting and thunderstorms continues to soar, forcing them to take the initiative to seek investment targets with excellent performance, high margin of safety and good compliance.
Market capitalization is committed to helping users find "high-quality listed companies", providing responsible "buyer research reports" and "buyer trading systems", creating securities trading software with the characteristics of registration-based trading as the service concept, and eventually becoming the hegemon of the registration system era.
(Registered system era of stock speculation will use the market value of the wind and cloud APP)
Revenue and user growth were both good
(1) Business features: negative gross profit "selling mobile phones"
The company mainly realizes revenue by providing communication services to users (service business), as well as selling and leasing mobile equipment (equipment business).
In 2021, the service business and equipment business accounted for 73% and 26% of revenue, respectively.
The Company's services business had higher gross margins, but the equipment business had negative gross margins for most of the period, resulting in lower overall gross margins.
In 2021, the company's service gross margin, equipment gross margin and overall gross profit margin were 76.1%, -9.4% and 54.3%, respectively.
Most carriers in the U.S. will provide users with the option to purchase or lease equipment in installments as one of the means of attracting users.
The company launched a campaign for its "no carrier" strategy called "JUMP!" "Equipment upgrade program that allows users to pay the difference for a new machine.
Old equipment returned at maturity for repurchase or lease will re-enter inventory on the company's balance sheet and be priced at a lower value of cost or net realisable value, with the corresponding impairment being included in the cost of operations, resulting in a gross margin of the equipment business typically negative.
Therefore, the service business is the core business of the company.
In 2021, the company's services business revenue was $58.4 billion, an increase of 15.8% year-on-year.
(2) Postpaid users are the core group
"Prepaid" and "postpaid" are the two most common payment methods offered by mobile operators.
Prepaid: Users need to recharge before they can use the service normally, and the phone is down at the same time in case of arrears.
Postpaid: Within a certain credit limit, users can use the service first and then pay the fee within the corresponding period, and can still use it normally in the case of arrears.
In the United States, postpaid payment is usually the mainstream payment method for large operators. Postpaid users have also been the company's largest customer base.
By the end of 2021, of the company's approximately 110 million users, 87.7 million are postpaid users, accounting for 81%.
The company also gained a large number of postpaid users when it merged with Sprint in 2020, and the proportion of postpaid users rose sharply by 10 percentage points that year.
Postpaid users are also the largest source of revenue for the company's services business, and the revenue contribution has increased year by year, further increasing to more than 70% since the merger of Sprint in 2020.
In 2021, about 73% of the revenue composition of the company's service business will come from postpaid payments, and only 17% will come from prepayments.
In addition, the company's service business also includes wholesale sales of bandwidth (wholesale), charging roaming charges, etc. (others) to MVNO, but the latter two contribute less to revenue.
In 2021, the company's postpaid revenue increased by $42.6 billion, an increase of 17.2% year-on-year, and prepaid revenue of $9.7 billion, an increase of 3.3% year-on-year.
For U.S. mobile operators, postpaid subscribers are often the most valuable customer segment.
First, the average revenue per user (ARPU) for postpaid users is typically higher than that of prepaid users.
Taking the company as an example, according to the disclosure, in 2021, the average monthly ARPU of the company's postpaid users is $47.8, while the average monthly ARPU of prepaid users is only $38.8.
Second, the churn rate of postpaid users is also significantly lower than that of prepaid users.
Even though the company's prepaid user churn rate has been declining in recent years, in 2021, the churn rate of prepaid users is still nearly 1.8 percentage points higher than that of postpaid users, 2.8% and 1.0%, respectively.
5G - a protracted race to fight for financial resources
Revenue and user growth have performed well, yet the company's profitability has declined in recent years.
In 2021, the company's operating profit margin and net profit margin were 8.6% and 3.8%, respectively, down 1.1 and 0.7 percentage points year-on-year, respectively.
Since 2019, the company's profitability has been mainly affected by the following two major events:
(1) Complete the merger of Sprint in April 2020;
(2) Continuous 5G investment in recent years.
Fengyunjun analyzed them one by one.
(a) Consolidation sprint increases financial pressure
The merger of Sprint has brought significant synergies to the company, mainly reflected in the significant improvement in the marketing, general and administrative expense ratio (SG&A), which fell from 31.4% in 2019 to 25.3% in 2021, a decrease of 6.1 percentage points.
However, after the merger of businesses, the company's depreciation and amortization increased significantly each year. In 2020-2021, the company's depreciation and amortization expense ratio was above 20%, much higher than the 15% before the merger.
The merger resulted in a 75% increase in the size of the Company's Property, Plant and Equipment (PP&E) to nearly US$4 billion, and the addition of nearly US$5 billion in intangible assets (excluding spectrum licenses).
In addition, as part of the merger, the company also assumed interest-bearing liabilities of up to $31.8 billion for Sprint. The book value of the Company's interest-bearing liabilities reached $74.2 billion by the end of 2021.
In 2021, the company's financial expenses amounted to $3.3 billion, with a financial expense ratio of 4.2%.
Finance expenses have rebounded since 2019, resulting in a sharp decline in the company's interest protection multiple from a high of 5.1 times in 2019 to 2.1 times in 2021.
(2) The scale of spectrum combination ranks first among US operators
The merger of Sprint, while increasing the company's financial pressure, also brought the company its most valuable asset — multi-band spectrum.
Sprint was the operator with the most spectrum in the U.S. before the merger. By merging with Sprint, the company's spectrum portfolio is the largest among U.S. mobile operators.
(Source: Cowen)
As of the end of 2021, the book value of the company's spectrum license is as high as $92.6 billion, of which $45.4 billion comes from Sprint. Spectrum licences are the most valuable assets on a company's books, accounting for 45% of total assets.
Spectrum licenses issued by the Federal Communications Commission (FCC) to operators are generally 15 years old, but the practice is to approve renewals at a symbolic cost after expiration.
As a result, the Company treats the acquired spectrum assets as intangible assets with an uncertain useful life, without amortization, and conducts an annual impairment test. In the past 3 years, the asset has not been impaired.
The company's current deployment of 5G dedicated spectrum is mainly from the low frequency band (below 1 GHz) and the middle band (1-6 GHz).
(Source: Company FY2021 Financial Report)
The current consensus in the U.S. communications industry is that the mid-band is expected to eventually become a major component of most 5G networks due to the balance between coverage and speed of the mid-band spectrum.
(Source: T-Mobile official website)
Low frequency band: long-wave transmission range is large, and it is not susceptible to building obstacles;
Medium band: Medium and long wavelength waves strike a balance between speed and range, covering a wide area at a faster speed;
High-frequency band: the propagation range of short waves is small, which can transmit data quickly, but it is difficult to penetrate buildings;
(Characteristics of three types of spectrum)
However, high-frequency band spectrum is still very important, and it is currently a cutting-edge technology for 5G applications, which has received a lot of attention in recent years.
The coverage radius of the high-frequency band is short and it is easy to be disturbed by buildings, but because it can provide a large number of high-speed connections at the same time, in some application scenarios, the characteristics of the high-frequency band are an advantage compared with the low-frequency band, such as in the city center, stadium, shopping mall and other lively commercial places.
T-Mobile has deployed high-band 5G in major U.S. cities including Atlanta, Dallas, Las Vegas, Los Angeles, and New York, with download speeds of up to 450 Mbps, peak speeds of nearly 1 Gbps, and upload speeds of nearly 50 Mbps.
(3) Capital expenditure is huge and cash flow is under pressure
The company's capital expenditures have increased year-on-year since 2018, mainly to expand the spectrum portfolio and carry out related network integration and construction.
In 2021, the company's capital expenditure reached a record $21.7 billion, up 75% year-over-year.
Huge capital expenditures have left their free cash flow negative for a long time. In 2021, the company's free cash flow gap reached $7.8 billion.
The 5G race between mobile operators is an extremely money-burning game, especially among large operators.
Take, for example, the FCC Spectrum Auction 107, which the company will participate in in 2021. According to the FCC, a total of 107 participants bid for more than $81.2 billion, and three large operators, Verizon, AT&T and T-Mobile, contributed 96% of the auction expenditure.
(Source: Fierce Wireless)
T-Mobile acquired 142 spectrums for $9.3 billion, while Verizon and AT&T spent $45.5 billion and $23.4 billion, respectively.
In response to growing financial pressures, the company has significantly replenished a round of liquidity in 2020, issuing $35.3 billion in long-term bonds that year.
As of the end of 2021, the company still had $6.7 billion in cash and cash equivalents on its books, down 36% from $10.5 billion in the year-ago quarter.
Throughout T-Mobile's rise to power, in the past 10 years, the company has achieved two major things:
The first is the "no operator" strategy. By innovating, the company has won a large number of users, saved the previously decaying performance, and accumulated strength.
The second is to close the gap with the two giants by merging Sprint, changing the competitive landscape of the industry and taking the lead in the 5G race.
The situation of "three-legged standing" in the US telecommunications service industry has been formed, but the competition in the 5G field is still in the white-hot stage, and the temporary first-mover advantage may be fleeting, and T-Mobile still cannot be slackened.
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