Kevin Winters
Five Forces Article Assignment

T-Mobile Turns an Industry on Its Ear

The article I found relating to Porter’s Five Forces was about T-Mobile and how their rejected merger with AT&T has caused them to go against many of the previously accepted practices of the mobile carrier industry. This started in 2011 when the Federal Communications Commission and the Justice Department blocked AT&T’s proposed $39 billion acquisition of T-Mobile. After the deal was called off, AT&T owed T-Mobile a breakup fee worth $3 billion in cash and $1 billion in rights to wireless spectrum which has allowed to T-Mobile to expand their service to better compete with the three other major carriers. Since the failed merger, T-Mobile has become an agitator in the industry and has said they want to eliminate every pain point for consumers in the industry. One of the major issues in the mobile carrier industry is how much the four major carries (Verizon, AT&T, Sprint, and T-Mobile) have started to dominate the market, making it hard for smaller companies to penetrate the industry. Consumers have a strong brand loyalty towards the major carriers because of how much better their coverage and service compare to smaller firms in the industry. Smaller firms cannot expect to have the capital to match the network size of any of the four major carriers which can be a major deterrent for customers switching to their carrier. These four major carriers hold an absolute cost advantage over smaller firms attempting to enter the market because of the many years they have been in the industry and resources they have been able to invest into their networks and services. There are also significant switching costs for customers looking to switch carriers, as all of the carriers charge early termination fees when customers attempt to leave their current carrier and switch to a competitor. One of the ways T-Mobile has attempted to change the industry is by eliminating these switching costs for customers by offering to pay any early termination fees the customer’s current carrier is charging them to leave their contract to switch to T-Mobile. Along with paying early termination fees of other carriers, they have eliminated any early termination fee for its own customers, meaning if they find a better deal than the one they have with T-Mobile, they are free to cancel their plan with them without penalty. All of these changes by T-Mobile has helped them become more competitive in the industry again and to take back some of the market share it had lost over the years. The main reason for the Federal Communications Commission and the Justice Department blocking the merger between AT&T and T-Mobile was because they feared that shrinking the market to three major carrier instead of four would give the carriers and incentive to increase prices. All of the power in the industry already lies with the four major carriers, and by taking one of these out of the market, regulators were wary of giving more pricing power to such a small number of companies. The major factor of this is because for customers, there are almost no comparable substitutes they can switch to. The service the four major carriers offer is far and above anything else in the market which carriers know and have allowed them to control pricing and extra charges in the industry. Mobile phone service has also become very vital to consumers, being able to connect with others at any time with the use of a cell phone has become almost a necessity for people now. This has only increased the power suppliers have over their customers. With T-Mobile being allowed to continue to operate and by giving them additional money to catch up to the industry, they have taken some of the power away from the major suppliers. The mobile carrier industry greatly benefits from the lack of substitutes. The service that is provided by the major carriers has yet to be matched by similar industries. Home phone providers still focus their efforts more on providing home phone and internet to its customers and haven’t attempted to start providing mobile phone services. Other similar industries like the home phone industry has yet to attempt to enter the mobile carrier market. Most companies that offer home phone capabilities to its customers have focused their efforts more in that market and providing internet services to their customers. So with no real threat from startups or similar industries to enter the market and take away market share, the major carriers have been able to stick with their pricing practices without the risk of losing their share of the market. With the mobile carrier industry being so consolidated and with the rate of growth in the industry, companies have to try to take market share from other competitors which has created an intense rivalry between them. T-Mobile being one of the weaker firms in the industry has attempted to cut prices and increase its promotion to attempt to take market share from their major competitors. Since the failed merger, they have drastically changed their pricing for phones and network service. First, they have split up payments for service and the cost of a new phone. Most competitors have plans that include the cost for service and a subsidized phone in their two-year plans, so T-Mobile has started advertising the price for their service alone. With AT&T, a two-year contract plan with 2-GB worth of data and a subsidized phone costs $95 per month, along with a $199 charge for a high-end phone, where T-Mobile has begun to offer monthly 2.5-GB data plans for $60 and if you want to buy one of the high phone, say the iPhone 5S which sells for $625, you’ll only be charged an extra $27 to cover the cost of the phone over two years. The major benefit to T-Mobile doing this is you no longer feel pressure to constantly upgrade your phone every two years, forcing you to sign up for another two year contract. With T-Mobile, after you’ve paid off the cost of the phone, the $27 you’ve been paying per month is taken off your bill. T-Mobile has also offered an upgrade program for those who like to upgrade their phone more frequently than every two years by paying an additional charge for the privilege of getting a new phone early. Since T-Mobile has done this, AT&T, Verizon, and Sprint have all begun to offer similar sets of plans, even though some of theirs are still not as flexible and cost more than T-Mobile. Because of the intense rivalry between companies in the industry, when T-Mobile makes such drastic changes that are taking away market share from its competitors, other companies have felt the need to follow suit and make changes of their own to retain their share of the market. With many of the changes T-Mobile has made with its plans, it has helped bring some of the power back to the buyers in the industry. With there being such a large number of buyers and their purchases relatively small, they have had almost no power in bargaining down prices or demanding better service. But with T-Mobile changing their plans to offer more flexibility and lower prices, they have begun to bring some of the power back to the buyers. Now instead of customers being locked into a two year contract, they can decide to change plans without any penalty. Also, by offering service and phone costs separately, customers no longer feel pressure to continually upgrade their phones after their contract is up because they will now see the monthly bill decrease in price. All of this, along with them attempting to get rid of switching costs related to moving to T-Mobile, has helped give customers more options on what they want to do without having a penalty related to their decision. Overall, T-Mobile’s efforts to shake up the industry have been successful. With the intense rivalry in the industry, they have forced other major carriers to change their practices to keep up with what T-Mobile has been doing. They have eliminated many switching costs for customers considering T-Mobile by offering to pay other competitors early termination fees and allowing their customers to leave a contract whenever they feel it’s necessary. T-Mobile has also helped give buyers in the industry more power by making companies in the industry battle to offer better prices and flexibility than their competitors. The decision by the Federal Communication Commission and the Justice Department to block the merger of AT&T and T-Mobile has helped restore some of the balance between the suppliers and buyers. With everything T-Mobile was able to get out of the failed merger to help restore their company and service, has helped to take away the power the suppliers in the industry had over pricing. This has become vitally important with the lack of substitute products that consumers can use. The only question left for T-Mobile is how much longer will they be able to sustain these low prices while also absorbing switching costs of the their new customers.

Link
http://www.nytimes.com/2014/02/27/technology/personaltech/t-mobile-turns-an-industry-on-its-ear-in-a-fight-for-its-life.html?ref=technology&_r=1