TIME Mobile

‘Cramming’ Suit Could Mean Big Trouble for T-Mobile

T-Mobile's John Legere
John Legere, chief executive officer of T-Mobile US Inc., holds an Apple Inc. iPhone as he speaks during an event in Seattle, Washington, U.S., on Wednesday, June 18, 2014. Bloomberg/Getty Images

Allegations that T-Mobile made millions off scam text messages could tarnish its consumer-friendly 'Un-Carrier' image.

T-Mobile has spent the last year and a half telling us again and again that it’s not like the other wireless carriers. Stuck in fourth place in the market after a failed merger with AT&T, the company transformed into the “Un-Carrier” as a way to differentiate itself from rivals Verizon, AT&T and Sprint. The campaign is part disruptive business model, part slick marketing. T-Mobile has ended two-year contracts, eliminated automatic overage fees and prevented its customers from racking up huge data charges while traveling abroad. And T-Mobile CEO John Legere, once a buttoned-up executive at AT&T, now hurls vulgarities at his competitors and crashes their corporate parties, essentially trolling them the way we all wish we could when our phone bill comes in each month. It’s an effective one-two punch that instantly conveys that T-Mobile is a company run by real people that want to help the little guy.

The “Un-Carrier” image is now in peril, thanks to a lawsuit from the Federal Trade Commission claiming that T-Mobile profited from bogus charges for unwanted premium text message services on customers’ bills. The annoying spam texts for things like flirting tips and horoscopes cost $9.99 per month and were charged to customers via third-party companies in a process known as “cramming.” T-Mobile kept as much as 40 percent of the money from these fees, generating hundreds of millions of dollars, according to the FTC. The Commission also claims T-Mobile buried these charges deep in users’ bills and refused to refund some customers’ money when they complained. T-Mobile could be on the hook for millions of dollars to repay customers for the charges, according to the FTC.

T-Mobile, however, says the allegations are without merit. In a statement, CEO John Legere said the company stopped billing for premium texting services last year and has already launched a program to refund customers for fraudulent charges. “T-Mobile is fighting harder than any of the carriers to change the way the wireless industry operates and we are disappointed that the FTC has chosen to file this action against the most pro-consumer company in the industry rather than the real bad actors,” he said.

Whatever punishment the courts might levy, the real cost to T-Mobile is in how this legal battle could affect its image. The company claims to be on a righteous campaign to save customers from petty charges from their cellphone carriers. Burying unwanted fees for daily horoscopes in customers’ bills is the antithesis of the “Un-Carrier” ethos.

“It does hurt T-Mobile’s brand because obviously it’s built around consumer-friendliness,” Chetan Sharma, a mobile industry analyst, says of the FTC complaint. “I was a bit surprised that T-Mobile didn’t just try to settle it.”

In Legere’s statement, the T-Mobile chief pointed out that deceptive charges from shady third parties have plagued the entire wireless industry for a long time. Last fall, T-Mobile, AT&T and Sprint all signed an agreement with 45 states to stop billing customers for premium text messages. Verizon did not sign the specific agreement but committed to the same principle. Meanwhile, the FTC is also pursuing non-carriers involved in cramming schemes, like companies that feed wireless carriers false phone numbers for billing, several of which it has already sued.

An FTC spokesman declined to comment on the cramming practices of other wireless carriers or whether the agency would file legal action against them as well.

It’s likely that T-Mobile’s actions regarding cramming were not out of the ordinary for the wireless industry—and the problem itself, a relic of the days when people bought digital goods through SMS rather than through online app stores, has mostly been eradicated. But this is supposed to be a company that’s about flouting the rules, not playing by them. A T-Mobile without the arrogant CEO and the customer-first mentality is just a fourth-place carrier with a wireless network that can’t stack up to AT&T’s or Verizon’s in many areas. Now that the company has been singled out by the FTC, it will be critical for T-Mobile that it proves it has customers’ best interest at heart.

“They should probably put out the data on [cramming] as to how big of an issue it is so people can understand the scale,” Sharma says. “The FTC’s lawsuit makes us believe that it’s a much bigger problem than it might be. Without the numbers, it’s very hard to say which way it is.”

TIME wireless industry

Meet the Man Who Brought T-Mobile Back From the Brink

T-Mobile Holds Announcement Event In New York
Steve Sands—WireImage

If Sprint goes through with its rumored acquisition of wireless carrier T-Mobile, it will acquire about close to 50 million wireless subscribers, a company that generates $24 billion in annual revenue and a loud-mouth CEO that is said to be the leading candidate for steering the new, combined company.

John Legere was once a buttoned-up corporate suit for the international divisions of companies like AT&T and Dell, as well as the CEO of the now-defunct telecommunications company Global Crossing Limited. But he dumped the typical executive attire in favor of a blazer, jeans and a magenta T-shirt when he took over the ailing T-Mobile in the fall of 2012. The unusual attire fits his brash corporate strategy, which is basically to dismantle all the money-making fees the wireless industry has baked into cell phone plans over the years.

Through its “Uncarrier” campaign, T-Mobile has eliminated two-year contracts, gotten rid of international data charges and offered customers huge subsidies to lure them away from competitors. At first, the moves seemed like a desperate ploy from a last-place company. But T-Mobile has steadily added subscribers as it has offered more headline-grabbing deals, racking up 2.8 million additional postpaid subscribers since Legere took charge. The other carriers have tried to stop the company’s rise by lowering prices and offering some bribes of their own, but that hasn’t blunted T-Mobile’s momentum. In the first quarter of the year, T-Mobile added more new subscribers than the other three carriers combined. “T-Mobile’s results since they started this almost two years ago speak for themselves,” says Bill Menezes, principal research analyst at Gartner. “It really has changed the way all the big carriers now offer their service.”

Beyond overseeing strategy, Legere has given T-Mobile’s brand awareness a huge boost. He has almost 250,000 Twitter followers and regularly mocks his competitors by name. At the Consumer Electronics Show in January, he got kicked out of an AT&T party, generating tons of free press for his company. He issued a fake press release earlier this year in which he compared AT&T to Darth Vader. Is the rebel act all for show? Perhaps—Legere has been in the telecommunications industry for more than 30 years and at one point worked for current Sprint CEO Dan Hesse at AT&T. But Legere’s persona, authentic or not, aligns well with T-Mobile’s branding as a disruptor.

“Legere has been very successful in translating his personality style and kind of getting that across to the industry as someone that’s disruptive, someone that’s unorthodox in his presentation and his language,” says Wayne Lam, a wireless communication analyst at IHS technology. “He’s kind of personified that new T-Mobile brand.”

Legere’s marketing skills and business smarts have made him the primary candidate to lead the combined Sprint-T-Mobile, according to Bloomberg. “He’s seen as a dynamic figure who’s been successful at changign things in the cellular industry, and that’s really something that Sprint needs,” Menezes says.

Masayoshi Son, the CEO of Softbank, which owns Sprint, said last week at a tech conference that he admires Legere. Son has also indicated that he is fan of T-Mobile’s deep-discount strategy and believes it could be effective at scale. “I’m not content for Sprint to remain No. 3 because if we could grow bigger, we will offer aggressive discounts and services, just like we did in Japan,” he said earlier this year.

Still, T-Mobile is on a bit of a running clock because its effort to attract new customers is wildly unprofitable. The company posted a $151 million loss in the first quarter and missed analyst estimates for both earnings and revenue. A merger would instantly give the combined Sprint-T-Mobile about double the subscriber base, as well as the financial backing of Softbank, which generated more than $5 billion in profit in the 2013 fiscal year. The combined company would also have a more reliable network that would come closer to approaching the quality of AT&T’s and Verizon’s, Lam says.

Legere wins in a potential Sprint merger no matter the outcome. Either he becomes CEO of a larger telco that could legitimately compete with the top two carriers, or he gets a severance package of up to $42 million if he’s not hired at the merged company. Legere has said that a merger could be good for T-Mobile, but he’d like to stay in control. “I have no desire to turn T-Mobile into the son of something else,” he told Business Insider earlier this year.

Consumers hardly have such clear winning scenarios. There’s no guarantee that a larger, less desperate T-Mobile wouldn’t roll back its disruptive ambitions. The brand itself might eventually be swallowed whole by Sprint, which is what happened to former carriers such as Cingular Wireless and Alltel. And company consolidation is what created the fee-ridden industry that T-Mobile has so effectively disrupted in the first place. This four-horse race has been good for consumers, but there’s no telling how competitive dynamics may shift if the number of competitors dwindles to three.

“You’re eliminating a consumer choice,” Menezes says. “Any time you eliminate choice, I don’t believe that that’s good for consumers.”

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