Why T-Mobile exiting the mobile industry is actually good for consumers

by Kevin Maney

AT&T (T) intends to buy T-Mobile – a U.S. division of Deutsche Telekom (DTEGY.PK) – for $39 billion in cash and stock. That means the No. 2 (AT&T) and No. 4 (T-Mobile) wireless carriers will consolidate, creating a behemoth and eliminating a competitor from the market. Almost immediately, much knee-jerk opposition was voiced.

But T-Mobile was a hobbled, middling player – not a threatening competitor to AT&T or Verizon (VZ) at the top end, or the fast-moving pre-paid entities like Leap Wireless (LEAP) and MetroPCS (PCS) on the low end. T-Mobile’s coverage is spotty, it was late to 3G, it’s not building 4G, it doesn’t offer the iPhone, and it’s not a serious choice for most of the app-loving smartphone crowd.

Just a month ago, T-Mobile reported it was losing contract customers. In the red-hot wireless market, losing customers is like a football player running for a clear touchdown and tripping over his shoelaces. Of the top four U.S. wireless carriers – Verizon Wireless, AT&T, Sprint (S) and T-Mobile – T-Mobile had by far the highest churn rate, which means it can’t keep customers it wins. T-Mobile’s churn last quarter was 30 percent greater than the carrier with the next-worse churn, Sprint.

In any given market, the most successful players tend to thrive at one extreme or the other.

T-Mobile couldn’t compete with higher-end carriers

At one end are the high-fidelity offerings. In the wireless universe, that means the most coverage, the best-performing networks, and the hottest phones. High-fidelity players don’t tend to compete on price – that’s not their role in the ecosystem. They compete on quality and features. That’s why all the ads you see from Verizon Wireless and AT&T are about coverage, reliability, speed and cool new devices – not about undercutting each other on price.

This is actually what we want the high-fidelity players to do – invest in driving the technology forward, even if that means prices stay relatively high.

That’s where the other end comes in – the lower-fidelity, lower-price end. The role those companies play is best described in The Innovator’s Dilemma. They find new and interesting ways to offer products that cost less than what the high-fidelity players sell, and while the offerings are typically not as gee-whiz – they’re still good enough for a lot of people.

This is the role of companies like Leap. They may not be the first to get customers on an iPad 2 on 4G, but they might get a broader swath of people from lesser socio-economic levels on low-end Android devices at serviceable speeds.

This is what we want the low-end players to do – create low-priced offerings that drive the high-fidelity players nuts by opening up the market to more cost-conscious customers.

No room in the middle

Companies that wind up somewhere between these two ends – not a high-fidelity experience but not a fleet, innovative, low-cost disrupter – generally don’t do well in any market, and the same is true in wireless. Consumers don’t have a great reason to buy from them. Best product? No. Lowest prices? No. Hmm.

And so T-Mobile didn’t do much for the ecosystem. Sure, the company took some chances, like being the first out with a Google (GOOG) phone. But T-Mobile’s network and resources will help the ecosystem more if they are joined with AT&T, which can invest in them and drive fidelity higher.

And that will no doubt kick Verizon Wireless in the shins and prompt it to invest yet more in competing with AT&T on fidelity. Without a hard push back from AT&T, Verizon could have taken a little breather since it’s ahead in customers, ahead in network capabilities, and has the iPhone. Now, if AT&T absorbs T-Mobile, Verizon will have to get more aggressive.

If the deal goes through, we’ll wind up with two strong rivals battling each other on fidelity – and a third, Sprint, that’s trying to make a name for itself as a technology leader. That’s enough to ensure healthy competition in fidelity, and that will push the technology ahead.

As long as the big guys can’t shut out the companies like U.S. Cellular (USM) Leap, MetroPCS, Virgin (VMED) and other newcomers, the little innovators will keep the heat on prices and make sure wireless stays affordable. All in all, an AT&T-T-Mobile combination is likely to make the industry more competitive than if T-Mobile had been left to struggle on its own.