April 23, 2014 / 5:56 PM / 6 years ago

AT&T margin weakness fuels concern about U.S. cellular sector

NEW YORK (Reuters) - Increasingly aggressive discounting is taking a toll on AT&T Inc and U.S. cellular rivals as they struggle to attract customers in a nearly saturated market.

The AT&T logo is pictured by its store in Carlsbad, California, April 22, 2013. REUTERS/Mike Blake

While recent price cuts by AT&T led to a surge in first-quarter subscriber adds that beat Wall Street expectations, average revenue per user fell, triggering a 3.2 percent share drop.

Other wireless carriers’ shares also declined, with T-Mobile US Inc, which has roiled the industry with a series of discounts and new pricing plans, down 2.8 percent.

AT&T’s result and the share fallout is the latest sign of how U.S. cellular phone providers, once seen as companies with strong growth potential, are having to resort to discounting in a bid to retain or lure clients.

“We don’t like AT&T and only like Verizon slightly better, “ said Michael Mullaney, chief investment officer at Fiduciary Trust Co in Boston.

All of the four main U.S. wireless providers have underperformed the Standard & Poor’s 500 this year, with Sprint and T-Mobile, which were lifted by merger speculation last year, particularly weak.

“Telecom seems like it’s in business just to pay its dividends. They’re not growth stories at all, they’re more like bond surrogates at this point, just making sure they have enough cash flow to cover their dividend payments over time,” said Mullaney.

T-Mobile and AT&T have similar networks, making it particularly easy for them to lure each others’ clients. Verizon Communications Inc and Sprint Corp lost 1 percent and 0.8 percent respectively.

Verizon reports its first-quarter earnings on Thursday, followed by T-Mobile and Sprint next week.

In response to growing competition from smaller rivals such as fourth-ranked T-Mobile, AT&T introduced a pricing plan last July eliminating down payments for devices and instead allowing customers to pay in installments, competing with a similar option pioneered by smaller rival T-Mobile.

While the unbundled plan sparked growth in AT&T subscribers, it also gave them greater flexibility to shift to cheaper options providing unlimited talk and text and allowing for a pool of data to be shared across multiple devices.

“The issue is that AT&T re-priced their installment base of customers,” said Kevin Smithen, a managing director at Macquarie Securities Group in New York, which estimates that AT&T’s average revenue per user fell 2.5 percent in the first quarter.

“For the remaining players, especially the industry leader, Verizon, the question is at some point do they join the fray with these price cuts,” he said.

Additional reporting by Ryan Vlastelica; Editing by Jonathan Oatis

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