T-Mobile Adds 1.4M in U.S.

Strong customer growth buoyed T-Mobile USA , the smallest of the top four mobile telephony providers in the U.S., and helped parent company Deutsche Telekom AG (NYSE: DT) weather a 43 percent drop in net profits, the company reported today.

The most consumer-focused of the top four American cellular companies, T-Mobile USA added about 1.4 million subscribers in the fourth quarter of 2005, up from 1.06 million in the previous quarter and 1.02 million added in the same period in 2004.

For the year, T-Mobile added 4.4 million total customers in 2005, compared to 4.2 million the year before.

"In a market this competitive and turbulent," said Info-Tech Research Group senior wireless analyst Carmi Levy, "year-over-year growth is a positive indicator."

The encouraging subscriber growth, however, masks some looming uncertainty for the European carrier. Following the recent acquisition of rival British mobile operator Telefónica O2 Europe plc by Telefónica SA (NYSE: TEF), Deutsche Telekom recalculated the value of its T-Mobile (UK) business, and took a $2.26 billion write-down on the division. (See Telefónica Swoops In on O2).

Longer term, the prospects for T-Mobile are clouded, as the cellphone market, particularly in the U.S., nears saturation. Like other service providers, T-Mobile has had success selling family plans and other bundled offers, but the consumer market will likely start to slow in the next two years. In addition, T-Mobile and other carriers face huge investments as they build out high-speed 3G networks, which will allow them to offer more sophisticated and higher-priced services. (See 3G/UMTS Passes 50M Subs.)

Recently T-Mobile’s senior VP of engineering operations, Neville Ray, sketched some early details on the company's 3G moves. With 3G testing moving forward in several undisclosed markets, the company plans to bring 3G services to market in 2007 and will likely bid in the upcoming spectrum auctions by the U.S. Federal Communications Commission (FCC) . (See Back to the Spectral Future and The Great Spectrum Rip-Off.)

Dispelling rumors that the U.S. arm might be spun off in 2006 rather than undertake the expense in upgrading to 3G, the company has reportedly earmarked several billion dollars for the shift.

"It's do-or-die time for T-Mobile USA to get into 3G," says Craig Mathias, principal analyst with the Farpoint Group .

The move to 3G is also crucial for capturing a larger share of the market for enterprise wireless services, which carry higher margins than T-Mobile's consumer business.

"Any carrier that isn’t actively targeting the enterprise market won’t be in any market for long," says Levy. "The corporate space provides a greater opportunity for carriers to deliver the kind of value-added services and margins that the increasingly cut-throat consumer business is only now beginning to achieve."

Bottom line: T-Mobile’s future depends on its success in the spectrum auctions and its ability to move into emerging wireless data and video markets. Data revenues now represent almost 10 percent of the company's average revenue per user, up from under 7 percent a year ago.

— Richard Martin, Senior Editor, Unstrung