It's shaping up to be a rough holiday for T-Mobile USA.
The carrier, a unit of Germany's Deutsche Telekom, earlier today reported a slight improvement in its results for the third quarter. That modest uptick was largely due to its uber-aggressive pricing promotions on the prepaid end, as well as an improving lineup of smartphones.
That's the good news. The bad news is that T-Mobile's most valuable customers--the ones willing to sign long-term contracts and pay more each month--are still leaving in droves. And there's no sign that the outmigration will stop in the fourth quarter. While all of the other national carriers get an iPhone in their stockings, T-Mobile is the only one left with coal. That leaves it at a serious competitive disadvantage.
"The fourth quarter is likely to worsen further," said William Power, an analyst at Robert W. Baird. "Driven by iPhone 4S competition, the company warned of a challenging fourth quarter, which is not a significant surprise."
The problem is the year's end is typically a strong season for a wireless provider. Customers in the holiday mood pick up a new phone and are usually willing to open their wallets up a bit more. That T-Mobile is warning of weakness when there should be strength is a troubling sign.
Furthermore, the company is still embroiled in the planned merger with AT&T, which has only gotten messier as the companies attempt to fight a Justice Department lawsuit blocking the deal. Who wants to sign a long-term service contract with a company that may or may not be around in a year or two?
In the third quarter, T-Mobile added 126,000 net new customers, almost entirely coming from its no-contract business, which added 312,000 customers.
Excluding connected devices, it lost 389,000 contract subscribers, which is actually an improvement from the second quarter and a year ago.
Contract customers are the most coveted because they are less likely to leave the service and usually opt for more expensive monthly plans. They're also the ones attracted by higher-end phones.
The total customer turnover rate rose to 3.5 percent, a tick up from a year ago and the second quarter. While the turnover rate for contract subscribers was stable, it was still higher than its competitors, suggesting its rivals are continuing to feast on its customer base.
That trend is likely to continue as the its rivals step up their marketing campaigns for the holidays. While T-Mobile spends a decent amount of advertising, it's consistently outgunned by its competitors with deeper pockets. T-Mobile's parent, Deutsche Telekom, is less generous. The fact that it has no intention of investing capital in T-Mobile is one of the reasons it was looking to sell the business.
Of course, T-Mobile's prepaid business, which did well in the third quarter, should continue to pick up the slack in the fourth quarter. But the customers are often less profitable and loyal. In addition, that side of the business will face considerable competition from the likes of MetroPCS, Leap Wireless, and Sprint's Virgin Mobile and Boost Mobile units.
While T-Mobile has done a lot to improve its lineup, nabbing a number of worthy Android and even Windows Phone devices, the lack of an iPhone of its own is a critical vulnerability. AT&T, Verizon Wireless, Sprint Nextel, and even regional carrier C Spire will be offering an iPhone this holiday. Even if customers don't buy the phone, the buzz around it is enough to draw them into stores. Those are customers that likely won't be looking at T-Mobile.
Last month, T-Mobile had to respond again to questions about why it didn't get the iPhone.
"T-Mobile thinks the iPhone is a good device and we've expressed our interest to Apple to offer it to our customers," the company said in an e-mailed statement. "Ultimately, it is Apple's decision."
The response came after C Spire announced it would be getting the device. Even U.S. Cellular had the chance to nab the iPhone, even though in the end it turned down the offer.
That T-Mobile wasn't approached by Apple speaks to its shaky position.
T-Mobile right now is throwing everything up at the wall, including promotions, its "4G" network, a variety of no-contract options and more smartphones, and seeing what sticks. It's unclear whether all of that will be enough to turn its fortunes around.