AT&T Inc. (T): Price Cuts Bring Margin Pressure

AT&T Inc. (T): Price Cuts Bring Margin Pressure
By AT&T [Public domain], via Wikimedia Commons

Stifel Equity Trading Desk analysts Christopher C. King and Josh James rate AT&T Inc. (NYSE:T) as a Hold as the company cuts wireless data plan prices by 20% for unsubsidized subscribers.

AT&T’s aggressive price cuts

AT&T Inc. (NYSE:T) is aggressively cutting prices on family wireless data plans, seemingly under pressure to add more customers as the industry becomes more competitive. The new prices, which went into effect Sunday, offers 10 gigabytes of data among four smartphones for $160 a month–20% less than AT&T had previously charged.

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The same plan at Verizon Wireless would cost approximately $100 more. Sprint Corporation (NYSE:S) charges $160 for a four-person plan that delivers one gigabyte of data with an option to add more per line. T-Mobile US Inc (NYSE:TMUS) offers a plan that gives four smartphone users 2 gigabytes of data apiece for $140 a month.

In the company’s latest TV ads, which also debuted on Sunday, the carrier is directly targeting Verizon Wireless with the new rate plans. VZW has made very modest changes during the recent round of price competition impacting the industry.

AT&T’s new data plan details

In order to be eligible for the new rate plans, customers will be forced to pay full price for their handsets, as opposed to receiving a subsidy from the carrier. Existing customers buying 10 gigabytes or more of data on a family plan will be automatically switched to the new plans, meaning they too will no longer be able to buy subsidized phones.

This will obviously have a negative impact on AT&T Inc. (NYSE:T)’s ARPU metrics, however margin pressures should be partially offset by the reduction in handset subsidies over time. Thus, to a certain extent, the most negative impact caused by the pricing plan changes could be felt by the handset manufacturers such as Apple Inc. (NASDAQ:AAPL) and Samsung Electronics Co., Ltd. (LON:BC94) (KRX:005930), as AT&T eliminates the subsidization of new handsets.

As predicted in our Sep. 3, 2013 piece, Is Large-Cap U.S. Telecom Becoming Uninvestable, we believe the wireless industry is in the midst of a period of increased competitive pressures, caused by more aggressive pricing (as seen in AT&T’s latest moves and T-Mobile’s contract and international calling fees eliminations), as well as increasing network quality parity as 4G LTE networks are quickly catching up with Verizon Communications Inc. (NYSE:VZ)’s lead, in addition to broad wireless saturation levels, will make wireless growth an increasingly difficult investment thesis for U.S. telco investors.

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