T-Mobile’s first Un-carrier initiative of 2017, which it is calling Un-carrier Next, is to make further adjustments to its T-Mobile One postpaid service plan. The main adjustments are to eliminate the added taxes and fees and to add a $10 bill credit for each line that uses less than 2GB of data in a billing cycle. The company’s aims include simplifying its tariff and being more transparent, but a main outcome of these adjustments is lower prices, which could have an impact on ARPU and profitability.
Changes to T-Mobile One result in lower prices
T-Mobile introduced T-Mobile One in August 2016 with the intention of eventually making it the company’s only postpaid service plan – replacing Simple Choice – and it did so in January 2017. The T-Mobile One tariff has been adjusted three times since launch; earlier tweaks were focused on optimization and HD video options, and the latest changes are to pricing.
The idea of offering just one service plan with an entry price – for one line – of $70 engendered some skepticism when T-Mobile One was introduced. With Simple Choice, the starting price for 2GB of high-speed data was $50. Even though the customer gets more with T-Mobile One, pricing alone is an important consideration. Some consumers don’t see a need for unlimited data and would rather settle for 2GB at LTE speeds and unlimited data at EDGE speeds for $50.
Under the newest tweaks, taxes and fees are included in the plan price, which essentially reduces the cost of a single-line plan from more than $80 to $70 and that of a plan with four lines from more than $180 to $160. This makes the $70 starting price point closer to the $50 Simple Choice starting price point, which comes to about $62 after taxes. On top of that, each line that uses less than 2GB of data in a billing cycle will save $10 – a feature T-Mobile calls KickBack – which could push the price lower than that of the cheapest Simple Choice plan. The latest changes make the One plan more attractive to consumers.
Financial consequences of eliminating taxes and fees and adding KickBack
The lowering of prices will not be without consequences for T-Mobile. The T-Mobile One plan threatens to push down T-Mobile’s profitability and ARPU, which are already the lowest among the four major US operators.
The risk to ARPU appears greatest with the higher-priced multi-line plans. On single lines, even with KickBack, T-Mobile is making at least $10 more in ARPU through the T-Mobile One offering. T-Mobile said that most of its single-line subscriptions are prepaid, however, so it’s doubtful that T-Mobile has many users at this price point. Four lines seems to be its sweet spot, since it is the offer the company most often leads with. In this case, four lines with 2GB of data per line on Simple Choice costs $100. On T-Mobile One the cost is $160, but if all four lines qualify for KickBack, the price comes down to $120, or $20 more in revenue per month than with Simple Choice.
However, replacing three- and four-line Simple Choice plans with 10GB per line is where T-Mobile risks losing ARPU. Three lines with 10GB each for $180 a month on Simple Choice becomes three lines with unlimited data at a maximum of $140 a month, and four lines with 10GB each, costing $220 on Simple Choice, compares to unlimited data for a maximum of $160 on T-Mobile One. In these two scenarios, T-Mobile loses minimums of $40 and $60 in revenue a month, respectively, per account.
Profitability will also take a hit. T-Mobile will have to cover the taxes and fees itself, including Federal Universal Services Fund, Regulatory Program & Telco Recovery Fee, State & Local Sales Tax, and State 911 charge. Taxes and fees come to approximately $8.50 per account, plus $3.33 per line. In 3Q16, T-Mobile had 11.932 million accounts, with an average of 2.78 connections per account. This equates to about $17.75 in taxes and fees per account, for a total of around $211.8 million. Absorbing these taxes and fees won’t have an impact on ARPU, since T-Mobile calculates ARPU based on service revenues for the specified period divided by the average number of customers during the period, divided by the number of months in the period, but covering these costs will have an impact on profitability.
New subscription additions should offset this impact somewhat, however. T-Mobile could also take other measures to reduce the impact on profitability, such as cutting costs.
Forcing transparency across the industry
Ultimately, with the introduction of T-Mobile One, T-Mobile is challenging its peers to go “all in” and include taxes and fees in the sticker price of their service plan offerings too. Such a response is certainly plausible: T-Mobile’s Un-carrier initiatives have long been spurring changes in the industry. Some US prepaid operators and operators in other markets around the world already offer all-in pricing, and T-Mobile will surely be aggressive with a marketing campaign highlighting the hidden fees from its competitors. However, in the short term, T-Mobile will have the challenge of competing with its all-in pricing against peers that don’t include taxes and fees in their advertised prices.
T-Mobile Update, July 2016, TE0001-001046 (September 2016)
“Un-carrier 11: T-Mobile takes loyalty programs to a new level”, TE0001-001033 (June 2016)
Kristin Paulin, Senior Analyst, North & South America