February 23, 2012 / 10:30 PM / in 6 years

T-Mobile USA chief has a steep hill to climb

NEW YORK, Feb 23 (Reuters) - T-Mobile USA Chief Executive Philipp Humm faces massive hurdles as he tries once again to get the customer-losing wireless service back on track after the failure of its proposed merger with AT&T Inc last year.

Humm plans to pump up spending on technology and advertising and is eyeing structural changes to raise capital, but it is not clear that this will be enough.

The executive needs to reverse customer losses exacerbated by the nine months of distraction when his parent company Deutsche Telekom sought approval for the failed $39 billion sale to AT&T. Moreover, he has to do this with a spectrum shortage and a network that is years behind those of its rivals.

Humm plans to invest $1.4 billion and reallocate spectrum in order to upgrade T-Mobile’s service in 2013 with LTE, a high-speed wireless technology. This year he is spending $200 million to rebrand the service to win back customers.

“2012 and 2013 will be the big rebuilding years,” Humm told Reuters. “We expect that to pay out big time after this.”

But analysts question whether T-Mobile USA can ever catch up since its biggest rival, Verizon Wireless, started offering LTE services in late 2010, followed by AT&T last year. Another big rival, Sprint Nextel, starts its LTE service this year.

“T-Mobile will be late to the LTE party, and its coverage will lag its major competitors for some time,” said Ovum analyst Jan Dawson.

T-Mobile USA’s network has been a headache for its parent company Deutsche Telekom for several years. In 2009 it sought out a U.S. partner to help it invest in network upgrades but by the next year it had abandoned that strategy and said it would look at other options like an initial public offer once it had strengthened the business.

With this in mind it appointed Humm, a former McKinsey consultant with a reputation as a restructuring expert, in May 2010. But Humm never really had the chance to get started.

Just two months after he presented a U.S. strategy to investors in New York in January 2011, the company announced its doomed plan to sell the unit to AT&T. That deal was ditched in late December, bringing T-Mobile USA back to square one.


Last month Humm again promised a strategy to rebuild the company. Now he is at pains to convince investors that his plan, announced on Thursday, will work as obstacles keep piling up.

Along with having an older network Humm also has to contend with heavy smartphone competition as T-Mobile USA is the only one of the top four U.S. operators which does not sell the Apple Inc iPhone.

T-Mobile USA blamed the iPhone for its loss of 706,000 contract customers in the fourth quarter alone. Humm said on Thursday that he would like to sell the iPhone, if Apple would only agree to his terms. But for now, the executive said he will stick to selling other smartphones.

Since AT&T, Verizon Wireless and Sprint all had to accept costly terms with Apple, taking heavy hits to their profits from hefty subsidies to Apple, it would be surprising if their smaller rival could get a more favorable agreement.

Also, Roe Equity Research analyst Kevin Roe said an iPhone would come with too much financial pressure for the operator, which is already increasing spending on its network.

“It would be very difficult to absorb (the iPhone) dilution given how much the business has shrunk and how low margins already are,” Roe said.

Meanwhile, Humm is focusing investments on growth in areas such as business services. He is tripling the company’s business sales force with 1,000 new employees. The idea is that selling to businesses, which are more loyal than consumers, would help reduce customer cancellations.

He also plans a rebranding in the third quarter to highlight the company’s focus on “value” services but, since T-Mobile USA is already seen as one of the best value services in the U.S. market, analysts questioned how this would help.

“It’s not like it’s a new message. It’s been their message all along,” said Piper Jaffray analyst Christopher Larsen who noted that Sprint is also considered a good option for cost conscious customers.

In fact, one of T-Mobile USA’s current problems has come from smaller rivals like Leap Wireless and MetroPCS Communications, which both also specialize in appealing to cost-conscious customers.

“The absence of the iPhone, relatively poor network coverage and the influx of smaller carriers taking over T-Mobile’s core customer base of young people looking for cheap service have all hurt it,” Ovum’s Dawson said.


Humm is also looking at “structural options” to help raise capital for the company with an aim to making it financially independent of its German parent. But he declined to give details or a timeframe for a decision in this area.

Options would involve raising new capital independently of its parent, but Humm would not say how. He told reporters that the company could use more capital to buy new spectrum as its current holdings are not enough for the LTE capacity the company would like to offer.

The quest for financial independence is due, in large part, to the fact that Deutsche Telekom’s focus on handing out dividends to its shareholders comes before its willingness to make the heavy investments needed to turn around T-Mobile USA.

As it is, the unit, which ranks No. 4 in the U.S. market, will already weigh on Deutsche Telekom’s results for the rest of 2012.

Deutsche Telekom acquired T-Mobile USA in 2001 in a bold and controversial move by Ron Sommer, the German company’s charismatic chief executive at the time.

The purchase of the company, then known as VoiceStream, was criticized at the time for being too expensive but turned into a key growth driver for the German company for several years.

But once the U.S. wireless market became more heavily saturated, it became tougher for T-Mobile USA to keep up with bigger rivals and fend off smaller competitors.

Humm is taking the right steps to improve the business, according to the Roe Equity Research analyst, but he questioned whether Humm’s 2-year rebuilding plan will still leave him chasing far behind rivals.

“While they’re resuming a competitive posture the rest of the market place is not standing still,” Roe said.

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