T-Mobile CEO John Legere is a personal hero of mine. First of all, the man is responsible for saving me (and you) hundreds of dollars a year. Second, I love a good strategist, and this guy was willing to embrace one of the boldest business strategies of the past decade.
Similar Products, Similar Prices
When two or more companies provide similar services/products to a market, there can be a temptation to pursue “price fixing.” Price fixing is the coordination of product prices between competitors to eliminate competition. In the United States, this practice is illegal under anti-monopoly laws. Market prices are to be created by competition.
The government actually does a pretty good job preventing official price fixing. The Federal Trade Commission pays very close attention to price changes and even watches local trade organizations to make sure that there is no discussion on how prices are determined. (Members of your local plumbers’ guild, for instance, are not allowed to talk about how much each of their businesses charge per hour.)
Despite this, price fixing can basically happen in a limited-competitor market via a mutual understanding of optimal pricing. I’ve written an example of how this can work below. Feel free to skip it if you’re not interested in the extra detail.
An Example: Cola Prices
(Disclaimer: I am in no way accusing Pepsi Co. or the Coca-Cola Company of unethical practices. I just needed an example of substantially similar product.)
Consider Pepsi and Coke—two products that dominate the cola market. Let’s say you are a business analyst at Pepsi and you set the price of your products. Currently, both Pepsi and Coke cost $0.50 to produce and are selling for $1.00 for a liter.
The colas are more or less identical with the majority of the market having a slight preference on which cola they’d rather drink. Basic free market theory suggests you should try to win the market by lowering Pepsi’s price. You could take the price all the way down to $0.51 and still make money.
But being the smart analyst you are, you realize that your goal isn’t necessarily to sell more cola than Coke; it’s to sell as much cola as you can at the highest price. That means you could try to lowering the price of Pepsi by $0.10 to get people to switch from Coke, but chances are that Coke will just do the same thing. Both companies will continue selling to the same customer base, but both will be making $0.10 less a liter.
It’s a pricing stalemate. However, you know something important: the business analyst at Coke isn’t lowering prices either. So, without speaking a word, you know that neither company wants to lower prices. In fact, if no one is going to compete, you could raise Pepsi prices to make more money and Coke would probably do the same. The market stays split, but now both companies get to enjoy bigger profits.
In cases like this, prices can be coordinated without being “fixed.” Now, instead of worrying about your opponent trying to undercut your prices, you can focus on figuring out the highest price you can charge before people stop buying your product.
This arrangement can be found throughout markets. Consumption determines a common set of features for a product to have and then two companies (A and B) share the market for the product at a price that works for both of them. Typically, a smaller company (C) will go after a minor portion of the market that isn’t attached to either A or B. These “alternate” companies are able to attract customers by selling for a little less than A or B (neither A or B will lower prices to match C because it would just create a price war.)
The Cellular Players
In the case of cellular service, there are four major carriers: Verizon, AT&T, Sprint, and T-Mobile. These companies are the “winners” of the mobile market and have consistently been drawing in customers as the market has consolidated and most local carriers have died off.
According to Statista, in Q1 of 2011 the market share stood like this:
- Verizon – 33%
- AT&T – 32%
- Sprint – 17%
- T-Mobile – 11%
I didn’t talk about D companies in my earlier example. That’s because they usually don’t fit into the market balance. They frequently become unprofitable or get purchased by one of the larger companies. The reason I picked 2011 as a reference point is because that was the year AT&T attempted to buy T-Mobile; the extra 11 percent of market share would have put AT&T well past Verizon as the nation’s biggest carrier.
Unfortunately for AT&T, the Department of Justice (DOJ) blocked the deal, saying it could destroy competition in the cellular market. The two companies went their separate ways late in 2011, with T-Mobile getting to keep a large deposit that AT&T had promised it regardless of the success of the deal.
The blocked AT&T deal left T-Mobile in a bind. A merger would have provided it with an easy way to exit the market with much of its value intact. With the DOJ blocking any merger, T-Mobile had two options: success or failure.
For the rest of 2011 and most of 2012, T-Mobile tried to do business as usual. Being in last for both customers and cellular coverage area, it aimed to keep the price of its services slightly lower than the other three carriers. The strategy didn’t work and T-Mobile’s market share continued to drop
Things were bleak. T-Mobile’s limited coverage, low revenue, and small customer base meant it had zero market advantages. Even if it could deploy the cash from the failed AT&T deal to make a revolutionary change to its network, Verizon and AT&T would be able to implement the new technology much faster and beat T-Mobile to market.
Then, in September 2012, T-Mobile made John Legere its new CEO. Legere was an outspoken critic of T-Mobile’s strategy and that general state of the cellular industry. He saw T-Mobile as a company that wasn’t just bad at playing the cellular carrier game, but a company that was foolishly trying to get better at playing a bad game.
Legere’s philosophy was simple: People hate their wireless carrier. He believed that carriers, much like internet providers, had grown comfortable selling a terrible, overpriced product because they knew everyone needed them. Legere argued that if T-Mobile could build a brand that was fun and customer-friendly, people would flock to it.
Under Legere’s strategy, T-Mobile started targeting customer pain points. It began calling itself the “Un-carrier,” a company that wouldn’t lock customers into a contract, letting them leave as soon as they became unhappy. Then T-Mobile improved its data network (using the money from AT&T) and began offering unlimited data plans at low prices, destroying customer perception that data services needed to be expensive.
Legere steeped his company in its new renegade personality. T-Mobile advertisements went from the girl in a pink dress to an intense graphic-styling that uses rock music and a muted palette to make their pink branding pop. Legere himself has gone out of his way to cause trouble. He crashed an AT&T party at the 2014 Consumer Electronics Show (AT&T foolishly gave Legere more press by throwing him out) and has been a gadfly to Verizon (even tweeting drinking games for people to play while listening to Verizon’s financial reports.)
Steadily, the other carriers started taking notice of T-Mobile’s strategy (and its climbing market share). Contracts began to disappear from carrier plans and data prices began to drop. But T-Mobile didn’t stop. They’ve continued to improve their service, eliminating nickel-and-dime fees, adding weekly free perks via their “T-Mobile Tuesday” program, and providing customer plans with free Netflix. While other carriers wait to see what customers will demand, T-Mobile is building a fan base by offering them things they didn’t know they wanted.
So far, the strategy has been a success. T-Mobile’s market share has been steadily climbing since 2013 and now makes up 17 percent of the market, having taken the #3 spot from Sprint (12 percent). T-Mobile’s stock value has risen 150 percent since mid-2013.
Crazy Like a Fox
The brilliance of T-Mobile’s approach is that it would have been insane for a more successful carrier to try. It turned the company’s weakness into a strength and gave them a unique way to reach the market.
When faced with difficulties (or outright failure), most companies study and emulate the success of the market leaders. In day-to-day life, this type of approach is generally good: when someone becomes successful, people should copy them to also be successful. It’s the basic foundation principle of adaptation and evolution.
However, Legere recognized that a game you are going to lose is a game you don’t want to play. Sure, AT&T and Verizon’s ability to guarantee ever-increasing fees was great for all carriers, but T-Mobile wouldn’t be around to enjoy them. T-Mobile faced a simple choice: slowly die with safe margins, or change how the game was played.
To create their own game, T-Mobile had to be able to do two things:
- Determine a new path for cellular carriers without getting to see other companies try it first.
- Actively destroy the profitability of the market they hoped to control in the future.
I cannot stress how difficult it is for many companies to pursue truly original business plans. When most companies say they like to be “innovative” or “think outside the box,” they typically want token marketing material or some vaguely improved version of a product they already sell.
Why? Because doing new things is scary. Companies want their decisions to be easy. They want the ability to shift the blame by saying “we did what was working, but it just didn’t work for us.” Corporate intelligence and innovation comes from having smart, honest people that understand how their market works. If you don’t have them at your company, you will chase trends forever.
The second part is almost as unthinkable to companies as the first. Companies take risks because they believe they will pay off in the future. The bigger the risk, the bigger the reward needs to be. Legere wanted to take a huge risk, but and also decrease their margins for the future.
Why would any company be so reckless? Because they don’t have any choice. No other company tried to do what T-Mobile did because they all had the option not to.
The most important lesson to take away from T-Mobile is to have confidence in your logic. A strategy that seems insane to everyone else could be the most logical approach available. Too often, people make bad decisions because they don’t want to risk their pride, go it alone, take responsibility, or make the effort to change. If you what’s best for you, shut out the noise and do it.
John Legere looked at the market and saw the impending doom of T-Mobile. Rather than be destroyed, he chose to burn the market down. He had the company to do it. Small enough to make a change, big enough to make others change. Now companies are starting to play by his rules, and from the looks of things, he’s not done changing the game yet.