AT&T Inc on Friday offered customers of No.4 U.S. mobile provider T-Mobile U.S. Inc a $200 credit to switch to its service, firing the first volley this year in what may become a price war that benefits consumers but plays havoc with profits across the industry.
AT&T, the No.2 U.S. mobile provider, announced the promotion after months of direct marketing against it by T-Mobile, and in anticipation of a new offer from its smaller rival on January 8.
The news depressed shares in T-Mobile and Sprint Corp - which have been rallying in recent weeks on optimism about potential consolidation - and to a lesser extent industry leader Verizon Communications.
The move could kick off a year of discounts from U.S. wireless operators, who are increasingly dependent on price to compete because they all offer similar phones and any network advantages are hard to prove, according to analysts.
MoffettNathanson analyst Craig Moffett described AT&T's move as the "early makings of a price war" that would boost customer switching, also known as churn, and in turn hurt profits.
"Everybody's fighting for market share because there simply isn't an organic market share left to be had," Moffett said. "The natural upshot to any strategy that pays customers to change service is higher churn."
Analysts also worry that No. 3 U.S. rival Sprint, which has been losing customers for years, will unveil dramatic promotions in 2014 as its new 80 percent owner, SoftBank Corp, is expected to push Sprint to regain lost ground.
TOOTH AND NAIL
AT&T's move may also bolster U.S. regulators' conviction that the industry is healthier with four national rivals, making it difficult for SoftBank to realize its reported ambitions to merge Sprint with T-Mobile, analysts said.
After failing to sell itself to AT&T in 2011 because of regulatory opposition, T-Mobile has been fighting tooth and nail with its one-time suitor. It halted four years of subscriber losses by criticizing its rivals and selling itself as more consumer-friendly with lower prices and more flexibility.
T-Mobile, which is 67 percent owned by Germany's Deutsche Telekom AG, posted two quarters of subscriber growth as a result of the promotions, and trumped rivals AT&T, Verizon Wireless and Sprint in phone customer growth.
In early December, AT&T cut service fees for customers who pay for their phones in installments due to pressure from T-Mobile, the first operator to offer this option.
AT&T is seen as the most vulnerable to T-Mobile's attacks because both companies use the same network technology, making it easier for their consumers to switch.
While analysts had expected Verizon Wireless and AT&T to shy away from any aggressive responses to T-Mobile, Credit Suisse analyst Joseph Mastrogiovanni said in a research note they now appeared to be under more pressure to discount.
"While the carriers try to remain rational while tweaking their plans and promotions, there is no doubt that they feel the need to get more competitive," Mastrogiovanni said. He estimated AT&T's latest move could cut its earnings per share by 1 to 2 percent depending on T-Mobile's response.
Citi analyst Michael Rollins said T-Mobile's next move could also prompt responses from Verizon Wireless as well as Sprint.
T-Mobile's outspoken Chief Executive, John Legere, has been building up anticipation for a new offer his company will unveil at the Consumer Electronics Show in Las Vegas next week.
In a New Year's Day tweet, he listed winning over family plan customers as a major goal for 2014, prompting speculation that he will announce discounts aimed at families at CES.
Many analysts say that to maintain its momentum it is crucial for T-Mobile to lure entire families from AT&T, which says the vast majority of its customers are in family plans.
Legere teased AT&T CEO Randall Stephenson after Friday's news, questio