Analysts: Price war sparked by T-Mobile could cut into carrier profits

The aggressive moves T-Mobile US (NYSE:TMUS) has made to lure customers, and the responses so far from AT&T Mobility (NYSE:T) and Sprint (NYSE:S), has investors and financial analysts worried that the carriers could cut into their own profits in an effort to attract subscribers.

AT&T announced earlier this month that it was going to offer up to $450 in credit to customers who switch from T-Mobile to AT&T and trade in their smartphones. However, AT&T executives have said this is only a temporary offer.

Meanwhile, Sprint announced its new "Framily Plan," a new calling circle offering that promises greater savings for everyone in the group as more people join. In addition, Sprint announced "Easy Pay," a new equipment installment plan.

T-Mobile seemingly topped them all by announcing that it will pay up to $650 in early termination fees (ETFs) for customers that want to switch to T-Mobile from AT&T Mobility (NYSE:T), Sprint or Verizon Wireless (NYSE:VZ). Customers can only get that full value if they also trade in their smartphones and purchase new ones from T-Mobile.

"The most disappointing thing is that AT&T is reacting to T-Mobile," Jefferies analyst Michael McCormack told Reuters. "How long is it before Verizon reacts?"

The market has long since shifted from pure organic growth to getting customers to switch carriers for better deals on pricing and devices. Carriers are trying to get as many customers as possible to also sign up for tablets, cellular-enabled cameras and other services such AT&T's Digital Life home automation and security service. However, for now the market is primarily geared toward getting switchers.

Roe Equity Research analyst Kevin Roe told Reuters he sees the "unhealthy market dynamic" getting worse, since he thinks AT&T will try more ways to get T-Mobile customers to switch. "There's more to come, and it will continue until AT&T has market-share stability," he said.

Other carriers, before T-Mobile announced its move on ETF, dismissed T-Mobile's attempts to lure customers as fleeting. "You don't really buy loyalty that well in my view, and those customers will switch back," Verizon Communications CEO Lowell McAdam said during a webcast of an investor conference on the sidelines of the Consumer Electronics Show.

As for T-Mobile itself, T-Mobile CFO Braxton Carter estimated in an interview with CNET that T-Mobile would pay an average of less than $150 per line under the plan, noting that some customers are well into their contracts and don't have high $350 ETFs. Carter said the move to pay off ETFs would be positive on a net present value basis, meaning T-Mobile might take a short-term financial hit but make up for it in the long term. T-Mobile plans to refurbish and resell the phones customers trade in and make additional revenue from that part of the plan.

For more:
- see this Reuters article
- see this Investor's Business Daily article
- see this CNET article

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