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Weighing prices for T-Mobile's Layer3 offering in early test markets

T-Mobile US Inc. is testing out marketing and bundling strategies for the new TV service that it promised after buying video distributor Layer3 TV Inc., but competitive and pricing challenges could limit the new service's appeal.

Wave7 Research operator Jeff Moore, who has two decades of telecom experience, recently found the mobile operator is selling a bundled Layer3 TV service in four of the five markets where Layer3 had previously launched its residential video offering: Dallas, Chicago, Washington, D.C., and Longmont, Colo., outside of Denver.

Moore found marketing materials for the Layer3 TV service in a store in Los Angeles, Layer3's fifth market, but a representative told him the offering was not yet available for sale at that location. Layer3 distributes digital TV services primarily over the internet, counting approximately 5,000 subscribers.

Moore said in an interview that the T-Mobile's Layer3 bundling tests thus far seem to be rolling out on a store-by-store basis, allowing for experimentation on pricing and marketing details. A T-Mobile representative confirmed to S&P Global Market Intelligence that the service is available in test markets but did not specify which ones.

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T-Mobile store front
Source: Associated Press

As of Sept. 26, Layer3's website offers select zip codes its Platinum allHD package at $80 a month for T-Mobile customers and $99.99 a month for everyone else. The discount for T-Mobile customers is offered through $19.99 in bill credits. In other zip codes where a T-Mobile bundle is not promoted on the site, Layer3's Platinum allHD package starts at $89.00 a month.

Network lineups vary by location, but the base Platinum allHD package — the smallest and cheapest available from Layer3 — includes about 150 channels. Customers can increase the size of the package over 275 channels by adding various premium and sports services, such as an HBO bundle for $15 a month, Showtime channels for $11 a month, Starz channels for $11 a month and Cinemax for $20 a month.

All told, with a set-top box and premium channel packages, the monthly cost for a Layer3 package with 238 channels and a T-Mobile discount would be $147 per month, excluding taxes.

With its large lineup of channels, Layer3 is most comparable to the top packages from traditional operators like Comcast Corp., AT&T Inc.'s DIRECTV, Charter Communications Inc. and Verizon Communications Inc. In the Chicago market, for instance, Comcast's HD Preferred package, which touts more than 220 channel offerings, costs $79.99 a month with no term agreement. Comcast's HD Premier package — which promises more than 260 channels, including premium channels like HBO, Showtime, Starz and Cinemax — costs $119.99 per month with no term agreement.

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One big competitive difference is that unlike Layer3, Comcast and other major pay TV operators also offer smaller, cheaper packages for consumers looking to save some money. Comcast's 100-channel Digital Economy Package, for instance, starts at $29.99 for the first 12 months with no term agreement. In mobile video services, AT&T offers its 65-plus channel DIRECTV NOW for $40 a month; its 30-channel WATCH TV service starts at $15 a month.

This adds up to competitive challenges for T-Mobile's Layer3 service, said Kagan analyst Ian Olgeirson. "It's difficult to see where T-Mobile can differentiate enough to set the service apart from the current slate of virtual multichannel services," Olgeirson said in an interview. Kagan is a media research group within S&P Global Market Intelligence.

One fact that has traditionally limited Layer3's ability to compete on price is the fact that it did not own all of the network equipment required for the home delivery of its service. Instead, it relied on broadband connections and interconnection deals provided by other internet service providers, a position that hindered Layer3's ability to expand beyond a handful of markets.

"Layer3 faces higher costs, especially for licensing content, than its major [pay TV] rivals because its smaller customer base does not provide the scale needed to leverage volume discounts," T-Mobile said in a regulatory filing earlier this year, estimating that Layer3's content acquisition costs are 20% to 30% higher compared to its larger rivals for the same programming.

T-Mobile's wireless network infrastructure and its large customer base, reaching 75.6 million total customers as of the end of the second quarter, could help to alleviate some of these issues for Layer3. T-Mobile executives said in August that the company remains on track with its plans to launch a new TV service in 2018. "We have our heads down kind of quietly expanding what we have ... while simultaneously developing a product that we intend to bring to market," T-Mobile President and COO Mike Sievert said at the time.

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