T-Mobile SpaceX Partnership: Potential Benefits and Risks (NASDAQ: TMUS)

Michael González

T Movable (NASDAQ:TMUS) recently announced a partnership with Elon Musk’s SpaceX (SPACE) to provide mobile coverage across the United States. This will be done using the mega-constellation of low-orbit satellites deployed by Starlink (STRLK) connected with T-Mobile’s cellular network.

Now, my goal with this thesis is to show how the deal can impact T-Mobile’s revenue as well as cash flow, whose quarterly changes are shown in the charts below.

T-Mobile revenue
TMUS revenue (quarterly) data by YCharts

I start by giving investors some background on satellite communications before assessing how partnering with Starlink will benefit the mobile network operator or MNO. For this purpose, according to a live video streaming the event on August 26, this is more of a technology partnership than a product launch.

Satellites extending networks on the ground

First, for those new to satellite communications, SpaceX, owner of Starlink, had previously offered 3,000 small satellites in LEO (low earth orbit) from July. These communicate with ground transceivers to provide wireless service on a paid subscription basis to more than 400,000 customers in several parts of the world, including the United States

It should be noted that Starlink has proven to be crucial in Ukraine in April this year by partially restoring communications services after the invading force paralyzed most infrastructure. As the satellites beamed signals back to earth, technicians from Vodafone (VOD) Ukraine hung Starlink antennas atop some of the deactivated tower masts so Ukrainians could talk to loved ones who had to flee the country and found in neighboring countries.

Looking at the modus operandi, Starlink’s gear is analogous to installing a satellite dish on your roof (pictured below), the associated WiFi router inside, and getting the signal to your computer laptop or your iPhone to be connected to the Internet. It is mainly used by those who live in remote locations where the cost of laying fiber connectivity is prohibitive and even erecting a tower mast for cellular mobile connection is not feasible due to the terrain.

Stellar Link

Starlink (www.starlink.com/)

This is why, for Starlink’s signal to work on cellular networks, a new generation of Starlink satellites will be needed, equipped with longer phased array antennas. This means that the Falcon 9 rockets will also need to be modified slightly to carry the new satellites. Also, some reconfiguration will be required, especially in the use of the midband 1.9GHz frequency spectrum of personal communications services. For this reason, the first experiment will not start until the end of 2022, with the service to be operational in certain areas from 2023.

For investors, all of this can be seen as extension T-Mobile’s terrestrial network will cover the entire continental United States, Hawaii, parts of Alaska, Puerto Rico and territorial waters, which means the end of mobile dead zones.

Revenue outlook

One of the benefits of this partnership is that T-Mobile subscribers won’t need any additional equipment such as satellite phones. Instead, for most of them, their smartphones will suffice. This means that the ORM does not have to wait for new phone models to monetize the service.

The goal is to charge a service fee for low cost plans, but at a lower rate than most satellite providers, but for most plans it will be a free add-on. As for connectivity, according to Elon Musk, it will be 2 to 4 Mbits by cellular area, which can mainly support voice calls and SMS, not surf the Internet. Therefore, the call would be for people who travel often, to remote places and need to make phone calls in case of emergency situations like getting lost while hiking, stranded in a remote place or lost at sea around the United States.

Currently, the alternative for these people is to buy a satellite phone from Iridium (IRDM), Globalstar (GSAT), Inmarsat or Thuraya. These can cost anywhere from $375 to $1,295 Additionally, annual service fees range from $348 to $750. Also, depending on the provider, voice calls range from $0.99 to $1.30 per minute.

Regarding the monetization part, no specific product has been announced, but the CEO of T-Mobile underline that there would be service charges for low cost plans, but at a lower rate than most satellite providers. Now, assuming the ORM charges an average of $800 in annual service fees and only attracts 10 million customers by the end of 2023, that would mean revenue of $8 billion. Dividing that number by two assuming it’s a 50/50 partnership, you have $4 billion for T-Mobile. This represents approximately 5% of last year’s revenue (table below).

T-Mobile Revenue and Gross Profit

Quarterly revenues and gross margins (www.seekingalpha.com)

More importantly, gross margins should improve as it is not about upgrading the network to carry 5G traffic, but rather connecting with Starlink and using existing infrastructure for text messages and low-bandwidth voice calls.

On the other hand, the MNO may need to spend more on its terrestrial network (towers and fiber, and microwave for backhaul) as the partnership grows from initial coverage of messaging and voice applications to satisfaction of requests for data necessary for browsing the Internet. It involves challenges to cover mountainous areas, deserts, sea areas or national parks and requires a high level of capital expenditure, but partnering with a satellite provider can make the difference.

Less investment and more cash

However, cellular networks require radio antennas to operate. These are the ones you usually see on top of tall towers which often contrast with the verdant countryside. MNOs like T-Mobile must constantly increase the number of antennas to expand coverage to new geographies and add more in existing locations to meet growing traffic demand.

To this end, he signed a new 12 year agreement with Crown Castle (CCI) to support the continued build of its nationwide 5G network with T-Mobile paying more money for tower and small cell rentals. Now, tower rental business accounts for a substantial portion of overall 5G spending and has resulted in higher quarterly investments for T-Mobile since 2018, as shown in the chart below.

T-Mobile capital expenditures
TMUS Capital Expenditures (Quarterly) data by YCharts

In order to get an idea of ​​Capex savings, I draw a parallel with AST SpaceMobile (NASDAQ:ASTS) which plans to use the antenna on board its BlueWalker satellites to transmit 4G and 5G signals directly to standard mobile phones. To this end, the American company has already signed an agreement with Globe Telecom (OTCPK: GTMEY) of the Philippines in April.

I estimated that it would cost Globe 9.5 times less (after factoring in satellite costs) to deploy 4G and Internet services using satellite technology than traditional terrestrial technology. Using the 9.5x multiple, T-Mobile could potentially reduce its investment from $3.68 billion to around $400 million (3,680/9.5), which is a huge reduction. This in turn would significantly increase its cash flow.

Value with a dose of realism

The above information is only an estimate because there are different topographies in the United States and the Philippines, but it has the merit of showing that satellite communications, which were only in the realm of sophisticated applications and at prohibitively expensive just five years ago, have now become sufficiently economical. possible to extend telephone connectivity on land. Here, I also like the complementary nature of the T-Mobile-SpaceX effort which uses both space and ground infrastructure to provide a end-to-end service to T-Mobile subscribers.

That said, the technology that will receive and transmit the signals from space to earth has yet to be tested and there may be some delay before subscribers can finally hook it up. That’s why I don’t rate the business based on estimated revenue gains or investment savings.

Still, as an innovative company with an overall buy rating and A+ momentum ratings, T-Mobile might once again flirt with the $147-$148 level after further updates around the project.

Rating of TMUS shares

Ratings and factor ratings (www.seekingalpha.com)

That said, after the chairman of the Federal Reserve clarified the path for interest rates last week, it is better to exercise caution and wait for the dust to settle before investing because there could be a greater market volatility.

Additionally, there could also be regulatory review by the Federal Communications Commission, as is usually the case with such projects, but one strong point that works in Musk’s favor is the ability to text or emergency calls when someone is stranded, meaning the effort can save lives. In this regard, the objective is also the redundancy of mobile service when events such as floods and other natural disasters lead to outages or delays in existing networks.


Additionally, since Starlink is also an Internet service provider, there may be areas of overlap as the partnership grows to add the data component to its service offerings. So an extension of T-Mobile’s reach could land it in Starlink territory. In the end, it all can come down to the partnership and type of revenue share model, with the details most likely to come at product launch. Therefore, for those willing to invest in T-Mobile due to the partnership, there are still some uncertainties to navigate, but it remains a fascinating space to watch.

Finally, investors will note that I refrained from making a comparison with Amazon (NASDAQ:AMZN) which signed an agreement with Verizon (VZ) for the Kuiper project in October 2021 because no satellite has yet been launched.

Casey J. Nelson