How the iPhone crippled T-Mobile

The Justice Department is suing to prevent AT&T’s proposed acquisition of T-Mobile USA, saying the deal would raise prices and not help customers, despite AT&T’s claims it would improve service by giving it more spectrum to deploy for 4G and 3G services. I never took AT&T’s arguments seriously; it sits on a lot of unused spectrum despite its cries of bandwidth poverty, and the real issue on spectrum is that it is too carved up by carrier, geography, and technology, so it can’t be used flexibly in a fast-changing world. I’d unify all the spectrum and lend it to carriers — not exclusively license it as done today — based on actual usage and demand, which would spur meaningful innovation and price competition.

Regardless of the larger issues, the immediate result of the federal action is to kill — or at least significantly delay — the buyout of T-Mobile by AT&T. T-Mobile customers can breathe a sigh of relief, as they’re less likely to be absorbed into AT&T’s world of bad service. But ultimately, T-Mobile is a dying company. Despite its slightly lower prices and a reasonable set of cellphones and Android smartphones, its contract-based customers are fleeing to Verizon Wireless, AT&T, and to a lesser extent Sprint, and its pay-as-you-go customers are looking more and more at the nation’s fifth largest carrier, Metro PCS.

The iPhone is a big reason T-Mobile is dying. And if Sprint gains the iPhone in October, as the Wall Street Journal has reported, it will die even faster. Android smartphone sales may be surging, but that hasn’t helped T-Mobile. Neither has T-Mobile’s fast adoption of HSPA+ networks, the 3G-plus network it misleadingly calls 4G (as does AT&T).

The iPhone and its very loyal customers are a big reason that AT&T has done well despite its poor reputation. Verizon has also fared nicely with the iPhone since it started selling the device in March. Sprint too will likely get a boost as it joins the ranks of “modern” carriers (despite the fact it already has a good selection of Android smartphones and actual 4G coverage available). Without the iPhone, T-Mobile will look like a loser to both potential and existing customers. Plus, iPhone owners are the kind of consumers desired by carriers: They commit to two-year plans repeatedly and thus are the economic bread and butter for each carrier — the very type T-Mobile is losing faster than anyone else.

The iPhone is not the only reason T-Mobile is struggling, but I’d argue it’s the biggest reason that affects customer behavior. T-Mobile’s other problems are invisible to customers, but just as important to its long-term survival (or lack thereof).

Because parent company Deutsche Telekom decided not to invest in the company’s U.S. spectrum licenses a decade ago, T-Mobile has very little spectum that can be used for the emerging LTE 4G networks. Over time, that decision will relegate T-Mobile to second-tier network status — unlike its four major competitors. It will take a good decade for the 4G transition to play out, but customers will notice the effects soon. Verizon, in particular, will begin to have significant 4G availability in the United States over the next two years, and AT&T and Sprint will aggressively play catch-up. Even cheapo carrier Metro PCS offers 4G LTE service now.

But that spectrum deficit is not visible to customers. The lack of the iPhone — and the stature conferred — is what they notice today. Then they think about the other issues, such as T-Mobile’s limited coverage outside urban and near-suburban areas.

It’s hard to imagine how T-Mobile can succeed in its current state. But who knows? Maybe it’ll get an iPhone too — it wouldn’t be a huge effort for Apple to provide an iPhone version whose 3G circuitry supports T-Mobile’s swatch of spectrum. Ironically, the very talk of AT&T buying T-Mobile may have led Apple to not make a T-Mobile-compatible iPhone, figuring it shoudn’t bother if they were to be one and the same.

Barring an iPhone miracle or a quick change in the fundmental regulation over spectrum (don’t hold your breath), T-Mobile will have comparably less to offer over time, and a diminishing set of customers will hinder its ability to fund new services. It may limp along for years, and if AT&T is permanently barred from buying it, it would do so alone, as T-Mobile’s cellular technology is incompatible with everyone else’s cellular technology. That’s why I thought AT&T’s buyout of T-Mobile would ultimately have no effect on the market, though I agree with the feds’ decision to block it as part of what I hope is a rethink of the nation’s innovation-stifling, oligarchy-friendly telecom policy.

Of course, another foreign carrier might be interested in getting a U.S. presence and replace Deutsche Telekom as T-Mobile’s owner, or a nontraditional company might seek to buy it. (Google is often suggested, under the probably misguided hope it would run a carrier less predatorily than others.) Or maybe T-Mobile could take the $6 billion breakup fee AT&T now owes it and use it to change its situation, such as buying LightSquared, the controversial firm launching its own 4G network.

Whatever happens in the long term to T-Mobile, in the meantime, you might get some great deals on an Android smartphone and 3G-plus service from T-Mobile if you live and work in an area where its network is strong.

This article, “How the iPhone crippled T-Mobile,” was originally published at InfoWorld.com. Read more of Galen Gruman’s Mobile Edge blog and follow the latest developments in mobile technology at InfoWorld.com. Follow Galen’s mobile musings on Twitter at MobileGalen. For the latest business technology news, follow InfoWorld.com on Twitter.