T-Mobile can’t eat Comcast’s lunch forever

T Mobile (TMUS 0.51%) added more residential Internet subscribers last quarter than any other company. The mobile operator added 560,000 subscribers, reaching a total of over 1.5 million just five quarters after its official launch.

In contrast, Komcast (CMCSA 1.99%) ended the second quarter with the same number of broadband customers as it started. While many investors were concerned about its earnings, management sees new entrants like T-Mobile as a temporary impact with no long-term potential to affect its results in any meaningful way.

T-Mobile faces two challenges to continue growing its home internet service in the future.

Churn will become a factor

T-Mobile’s home internet service hasn’t been around long enough for very many people to cancel it. But in the future it will be a completely different case. “As the base grows, we know that math is math and churn will increase,” T-Mobile CEO Mike Sievert told analysts during its second-quarter earnings call in late July.

Subscribers can cancel for a variety of reasons. Customers are moving and T-Mobile may not be able to serve them. You could switch to a different service provider like Comcast. They may decide that they don’t need internet at all at home and that their mobile wireless connection is good enough.

As subscribers start canceling service, T-Mobile must bring in more gross adds to make up for those losses. In the short term, T-Mobile has several opportunities to increase these gross additions. It still has a huge base of T-Mobile wireless service subscribers to sell to. It is rapidly expanding its 5G network and will soon cover the entire country, making more households eligible for the service. And it’s just beginning to break into the enterprise and small business market for broadband services.

However, over the long term, there are fewer catalysts that could help sustain such strong gross additions. And of course, as the base grows, so does the number of customers leaving the service each quarter.

Of course, churn is also a factor that Comcast needs to address. To that end, it has maintained relatively low churn rates despite competition from T-Mobile. Churn rates remain below where they were in 2019, management says.

T-Mobile faces physical limitations on how many customers can be served

Another factor that will ultimately impact T-Mobile’s growth is that it can’t physically serve as many homes without impacting its wireless subscribers’ connections. Because T-Mobile’s primary business is selling wireless services, it will not offer home Internet service in markets where it doesn’t have the bandwidth to serve both.

While T-Mobile has a goal of reaching 7 to 8 million homes by 2025, it’s not clear how many more it could serve. To do so, T-Mobile would need to purchase additional spectrum licenses and deploy devices using those spectrums to expand the capacity of its network. Meanwhile, the bandwidth needs of mobile customers in the 5G era are still relatively unknown. T-Mobile is modeling an aggressive increase in data usage, but really smart people have repeatedly been very wrong about how much data people will be using in the future.

At some point, T-Mobile won’t be able to serve as many new homes, even if the demand is there. Combined with the growing impact of churn as the base grows, it’s no wonder Sievert moderated his comments on his forecast of 7-8 million households by 2025.

“We have now reached a pace that extrapolates us towards our goals,” he said. But he also warned: “That was not a prognosis for you, however. This was not a prediction that it will be at this pace; it could be higher, it could be lower. This is an emerging business.”

The future of T-Mobile’s home Internet business is still up in the air and won’t be able to pull subscribers away from Comcast and other cable providers indefinitely.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool recommends Comcast and T-Mobile US. The Motley Fool has a disclosure policy.

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