T-Mobile Acquisition Not Very 'Disruptive'
We don't think the no-moat telecom can offer a competitive video product profitably.
T-Mobile US (TMUS) announced Dec. 12 that it has agreed to acquire Layer3 TV, a pay television distributor. Management says it will use the same "uncarrier" strategy that it used to "disrupt" the wireless telecom business to "disrupt" the pay TV market.
While we agree that many people are frustrated with their pay TV providers, we struggle to see how T-Mobile can offer a competitive video product profitably. Its uncarrier moves have allowed T-Mobile to gain the majority of net new wireless subscribers over the past four years, but the company still doesn’t generate a return on investment equal to its cost of capital, which is why we assign it a no-moat rating.
Likewise, scale is critical in pay TV as the content providers generally have the upper hand with regard to rebroadcast and affiliate fees. Thus, a distributor will find it hard to generate high returns on capital without a large number of customers. We believe this will be difficult for T-Mobile to achieve, so this deal adds nothing to benefit its moat, in our opinion. We are maintaining our fair value estimate and believe the shares are fairly valued.
Currently, Layer3 offers a cable TV-like service in a few markets with a large number of channels for about $75. Once the deal closes, T-Mobile will offer several additional options, including low-priced ones, which is more in line with its image of low prices. However, this makes generating a high return even more difficult. The service is purely video and requires an Internet connection. T-Mobile customers can use their wireless service as their broadband connection. However, we are skeptical of the company's network’s ability to handle large amounts of customers streaming video at home--where the majority of video is consumed--at the same time, during the evening, rather than running off a fixed broadband network owned by a traditional cable TV or telephone company.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Allan C. Nichols does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.