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How the iPhone Led to the Sale of T-Mobile USA

Deutsche Telekom’s announcement over the weekend to sell its American wireless unit, T-Mobile USA, to AT&T for $39 billion ended a decade-long foray into the American market that was undermined, in part, by one big event: the advent of the iPhone.

Apple iPhone 4
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Apple iPhone 4

Until Apple introduced its highly popular touchscreen device in 2007, which went on to become the world’s leading smartphone, Deutsche Telekom had been generating decent sales from its American operation, with growth in some years surpassing that achieved in Germany.

But after the iPhone went on sale, sold exclusively at first by AT&T in the United States, T-Mobile USA began to lose its most lucrative customers, those on fixed monthly plans, who defected to its larger American rivals — AT&T and Verizon Wireless, which began selling the iPhone in February.

The percentage of T-Mobile USA’s contract customers fell to 78.3 percent in 2010 from 85 percent in 2006, according to the company’s annual reports. During 2010 alone, T-Mobile USA said it lost 390,000 contract customers to rivals.

“The iPhone effect cannot be underestimated in this decision,” said Theo Kitz, an analyst at Merck Finck, a private bank in Munich. “Without being able to sell the iPhone, T-Mobile was in an unsustainable position and T-Mobile USA became a problem child.”

The sale of the American unit by Deutsche Telekom, which is based in Bonn, was welcomed by investors, and the company’s stock was up more than 12 percent in late trading Monday in Frankfurt. Under terms of the deal, Deutsche Telekom will receive $25 billion in cash from AT&T and $14 billion in stock, representing an 8 percent stake in the AT&T. If the deal clears an antitrust review, AT&T would become the top wireless carrier in the United States.

CNBC - Ctia Wireless 2011- The Wireless Connection
CNBC - Ctia Wireless 2011- The Wireless Connection

The Deutsche Telekom chief executive, René Obermann, said the sale of T-Mobile USA was the best outcome for the company, which last year began looking for a partner for the unit, ranked No.4, behind Verizon Wireless, AT&T and Sprint.

Mr. Obermann said Deutsche Telekom would use proceeds from the sale to modernize its European networks, which extend from Germany to Britain, the Netherlands, Austria, Poland, the Czech and Slovak Republics, Hungary, the Balkan peninsula and Greece.

“We found the best solution for our company, our customers and our shareholders,” Mr. Obermann said in a statement. “Our position in Europe will be strengthened.”

The sale of the unit would reduce Deutsche Telekom to a purely European operator. Its largest competitors on the Continent, Vodafone, France Télécom and Telefónica, all have extensive wireless businesses outside of Europe.

"“Without being able to sell the iPhone, T-Mobile was in an unsustainable position and T-Mobile USA became a problem child." -Analyst, Merck Finck, Theo Kitz

“T-Mobile USA has always been a challenging business for Deutsche Telekom, but at the same time one that has offered growth potential to offset a stagnating western European business,” said Thomas Wehmeier, an analyst at Informa in London. “Without T-Mobile USA, Deutsche Telekom becomes a pure European play.”

The American market has always been challenging for European operators. Vodafone, the British mobile operator that has a 45 percent stake in Verizon Wireless, has not received a dividend from its venture in the United States since 2005. Telefónica, the Spanish operator that is the largest in Latin America, has never made a bid for the American market, despite its growing Spanish-speaking population.

Through its stake in AT&T, which would make Deutsche Telekom the largest single shareholder in the operator, the German company will “continue to share in the fast-growing U.S. mobile business,” Mr. Obermann said.

Deutsche Telekom entered the American mobile market in May 2001, when it completed its $50.7 billion acquisition of VoiceStream, a wireless operator in Seattle whose network ran on the global system for mobile communications, or GSM, the same technology as used by Deutsche Telekom and most other European operators.

For most of the past decade, the market in the United States grew faster than Deutsche Telekom’s own home market in Germany, where three aggressive competitors — Vodafone; O2, a unit of Telefónica; and E-Plus, a unit of the Dutch operator KPN — compete for mobile customers.

In some years, the unit was Deutsche Telekom’s star performer. In 2006, revenue at T-Mobile USA rose 15.5 percent from 2005, helping offset a 5 percent decline in the German market. The business helped finance Deutsche Telekom’s extensive severance costs to streamline German payrolls and adapt to the company’s eroding domestic landline business.

But the positive effect from T-Mobile USA began to diminish as the subsidiary started losing contract customers after the iPhone’s introduction, which came at a time when the German company had to consider spending billions of euros to upgrade its American network grid to the latest standard, Long Term Evolution, or LTE.

At the end of 2010, T-Mobile USA had the highest monthly “churn” rate of departing customers, 3.2 percent, more than double the 1.3 percent rate of Verizon and AT&T, according to figures from Merrill Lynch. The German company was earning 21 percent of its revenue in the United States from data services, compared with 30 percent at Verizon.

Until recently, the German operator resisted selling bulk access to its American network to virtual mobile network operators, which limited its ability to generate additional revenue.

“Deutsche Telekom had the wrong strategy in the U.S. market,” said John Strand, an analyst in Copenhagen who tracks virtual network operators. “It acted like it was a copy of T-Mobile Germany, the market leader, but that wasn’t the case. I know of at least 30 virtual network operators which were rebuffed by T-Mobile USA. It was a mistake.”

In the end, Deutsche Telekom decided the looming costs of its network upgrades in the United States and additional purchases of broadcast spectrum were too risky given the decline in contract customers, Mr. Kitz, the Merck Finck analyst, said.

After factoring in all of the costs and profit generated by T-Mobile USA over the course of its engagement, Deutsche Telekom will be left with a profit of about €500 million, or $710 million, from its unit, Mr. Kitz estimated.

He said he expected the German operator to inject part of the money into its Greek operator, OTE, which is struggling amid the country’s economic crisis. “The Greek business is not going well,” Mr. Kitz said.

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