Investors Flee Telecom On Price-War Fears After AT&T Price Cut

Shares in U.S. mobile operators fell sharply on Monday after a AT&T Inc price cut fueled fears from investors that market leader Verizon Wireless and other rivals would have to react.

AT&T shares closed down 4 percent a day after the No. 2 U.S. mobile services provider slashed the monthly fee for a data plan from $40 to $15.

Some analysts saw the price cut as a drastic step that could force rivals such as Verizon Communications to response with their own price cuts and, as a result, hurt profits across the industry. AT&T and T-Mobile have been at each other’s throats for months, with offers aimed at each other’s customers, but many analysts had hoped that fight would be contained.

Shares in Verizon fell 3 percent, as did No. 4 operator T-Mobile US shares, and Sprint stock ended down 5 percent after AT&T’s move on Sunday.

“Now we’re seeing real evidence of increasing competition having real cost to the industry,” said Jonathan Chaplin, a New Street Research analyst who saw the price cut as a sign that AT&T’s recent efforts to regain market share lost to T-Mobile had not been successful.

“It makes investors worry the market is really in trouble.”

AT&T lowered its monthly fee for a 10 gigabytes monthly data share plan aimed at families to $15 per device, from $40.

Chaplin expects the price cut to shave a relatively modest 0.5 percent to 1 percent off his previous estimate for AT&T 2014 earnings before interest, tax, depreciation and amortization of $42.7 billion and a 1 to 2 percent cut to his 2015 EBITDA estimate of $43.3 billion.

But he sees the move as only one step in what could result in a bigger decline in prices across the industry.

“If this was the end, we wouldn’t care and neither would the market,” Chaplin said, but added: “World War I started with one archduke getting assassinated.”

The competitive pressure started with aggressive discounts by market laggard T-Mobile last year, which helped the company report three quarters of customer growth after four years of losses, mainly at AT&T’s expense.

AT&T countered on January 3 by offering to pay consumers to switch from T-Mobile, while No. 3-ranked Sprint promised big discounts for family and friend groups days later. T-Mobile then upped the ante with an offer to cover the hefty exit costs for consumers switching to its service.

T-Mobile’s announcement last month “may have pushed AT&T too hard,” making it fight back, J.P. Morgan Securities analyst Philip Cusick said on Monday.

“The back and forth in price cuts is a negative for the entire wireless industry,” J.P. Morgan’s Cusick said.

Some analysts had hoped that at least Verizon could stay above the battle, but Jefferies & Co analyst Mike McCormack said on Monday that AT&T’s new pricing plan also targets Verizon’s “prized” family plan customers.

McCormack said it was unlikely that Verizon would respond with service price discounts. But others were less convinced, as Verizon Chief Financial Officer Fran Shammo said this month that his company would react to competition when required.

“(Verizon) will be the one to watch, in our view as they have been on record saying it would react to price moves if they felt the need,” Wells Fargo Securities analyst Jennifer Fritzsche wrote in a research note.

A Verizon Wireless spokesperson said that the company does not comment on its competitors plans.

AT&T said its price change means that a family of four would pay $160 per month or $100 less than Verizon Wireless, or $80 less than Sprint Corp, and $20 less than T-Mobile US for a comparable service.

Jackdaw Research analyst Jan Dawson said AT&T could increase

its revenue by using price cuts to encourage more data usage.

“The strategy is important as the market becomes saturated and there are fewer new customers to go around,” he said.

AT&T shares closed down $1.37 at $31.95 on the New York Stock Exchange. Verizon shares dropped $1.61 or 3.3 percent at $46.41, Sprint stock fell 42 cents or 5 percent to $7.85 and T-Mobile shares fell $1.04 or 3.4 percent to $29.53.

Source : Reuters