Deutsche Telekom presented its quarterly results in Bonn last week but all eyes were on what was happening on the other side of the Atlantic at its struggling US subsidiary. The results from T-Mobile USA, which has been struggling for at least a year, showed no signs of improvement. The firm suffered a 7.8 percent year-on-year decline in revenue and a 5 percent decline in earnings (EBITDA). Negative currency swings were partly responsible but so were customer losses: T-Mobile USA lost 77,000 customers to rivals during the quarter. The defections – mostly churn to larger rivals such as Verizon Wireless and AT&T – mainly comprised lucrative contract customers, which declined by 118,000 in the quarter (offset by a 41,000 rise in prepay customers). 

Despite its problems T-Mobile USA remains a vital part of the Deutsche Telekom group. It accounts for around a quarter of the group’s entire revenue (second only to Germany) and is its largest single mobile unit. As a result, Deutsche Telekom CEO Rene Obermann finds himself under intense pressure to engineer a recovery at the unit. There are many options being considered, but they are all focused on the same aim: to bring T-Mobile USA’s network up to speed with the technological advances being made rivals. T-Mobile USA has long being playing catch-up on this front. It didn’t even begin rolling-out 3G until 2008, by which point its main rivals had already outlined their plans to move to so-called 4G technologies: LTE in the case of Verizon and AT&T, WiMAX at Sprint.

In the short term, the operator is planning to squeeze the most out of its current 3G networks. Deutsche Telekom said last week that it is aiming to upgrade T-Mobile USA’s entire 3G footprint to HSPA+ by year-end, eventually covering more than 100 metropolitan areas and 185 million people. This should give T-Mobile the most expansive – and, it claims, the fastest – mobile broadband network in the country. But for how long? The risk is that any advantage gained is likely to be quickly extinguished when Verizon goes live with LTE later this year, and when AT&T follows in 2011. T-Mobile will not even have much of an advantage in terms of devices; the GSA said in January that there were just 32 HSPA+ compatible devices available, nearly all of these dongles (T-Mobile’s own ‘webConnect Rocket’ USB data stick claims to be the first HSPA+ device from a national US operator).

With T-Mobile USA’s network technology weaknesses well known, the operator has inevitably been linked with the proposed wholesale LTE network being planned by New York hedge fund, Harbinger Capital. On the face of it, the ability for T-Mobile to rent capacity on the new network rather than acquiring spectrum and building its own seems an ideal way of quickly bringing itself up to speed with its larger rivals, many of which are expected to be barred from renting large amounts of capacity on the wholesale network themselves. But Harbinger’s ambitious network is fraught with potential problems, technological, regulatory and – not least – financial: the firm will need to raise in excess of US$5 billion to get the network up and running (a huge amount even for a well-heeled hedge fund).  

More attractive is some sort of deal – either via network-sharing, the pooling of spectrum or even a full merger – with one of T-Mobile’s existing domestic rivals. The boldest move would be a tie-up with Sprint. This would give T-Mobile access to Sprint’s advanced WiMAX network operation – Clearwire – which is on track to achieve 120 million US population coverage by year-end. A deal that would have seen T-Mobile provide funding for further network expansion in return for access was reportedly discussed – and seemingly dropped – late last year. T-Mobile has also been linked with similar deals with AT&T, MetroPCS (a US prepaid operator that holds LTE spectrum) and the country’s cable TV operators, though no deal has yet to emerge. 

If no suitable partnership can be found, Deutsche Telekom has not ruled out spinning-off or floating the US unit, though investors will demand a high price tag for letting go one of the firm’s main engines of growth and revenue.

Obermann, therefore, will face challenges however he decides to tackle the T-Mobile USA problem – and he can’t risk too many more negative quarters at the unit like the one suffered in Q1. If there’s a crumb of comfort to be had, how about this: a year ago, Deutsche Telekom reported a first quarter net loss on the back of a hefty EUR1.8 billion write-down at its UK arm, T-Mobile UK, which was then withering under intense competitive pressure. Fast forward one year – and one major deal later – and the firm is the clear market leader and in rude health. Obermann will be hoping to pull a similar rabbit out of the hat in the US this summer.

Matt Ablott, Senior Editorial Analyst

The editorial views expressed in this article are solely those of the author(s) and will not necessarily reflect the views of the GSMA, its Members or Associate Members