Analysis: T-Mobile strategy could eat into business of AT&T, Verizon

By Sinead Carew

NEW YORK (Reuters) - T-Mobile US Inc is expected to post stronger subscriber growth than its larger rival AT&T Inc for the second straight quarter, suggesting the upstart carrier's bold new customer policies could shake up the U.S. mobile market.

Intensifying competition from T-Mobile, the No. 4 wireless provider, and a challenges from No. 3 Sprint Corp, may deplete revenue growth at AT&T and the market-leader Verizon Wireless at time of slowing overall growth.

Since March, T-Mobile has positioned itself as a consumer champion by promising more flexible policies and cheaper prices, aiming to address complaints about what Chief Executive John Legere calls a "stupid, broken, arrogant" industry.

The strategy seemed to bear fruit quickly as T-Mobile's second-quarter subscriber growth ended four years of losses and beat analyst estimates and AT&T's growth.

Now T-Mobile is expected to report another 444,000 net additions in its third-quarter report due November 5, according to the average estimate from seven analysts contacted by Reuters. Some of them say the estimates may prove too conservative.

By comparison, AT&T reported 363,000 net subscriber growth on Wednesday. And without tablets, analysts estimated that AT&T would have had a net subscriber loss.

While T-Mobile likely picked up customers from all its rivals in the quarter, AT&T is particularly vulnerable because its customers can easily move their phones to T-Mobile's service as both companies use the same network technology.

"T-Mobile is taking market share from everyone," said Craig Moffett an analyst at MoffettNathanson but, he added that it is "specifically targeting AT&T at every turn."

Consumers have been drawn to T-Mobile's lower service prices, network improvements and its April introduction of Apple Inc's iPhone, said Joe Pasqualichio, an analyst at Eaton Vance, which owns 50,000 T-Mobile US shares. "They're clearly having an impact," he said.

Pasqualichio said it is hard to predict how long this will last because, along with individual subscribers, T-Mobile needs to attract family-plan users, which represent about 90 percent of AT&T customers.

"There's a question of whether or not they can attract the family plans," he said. "They tend to be more sticky customers."

But, Deutsche Bank analyst Brett Feldman points to a sharp drop in T-Mobile's churn, or customer defections, to 1.58 percent in the second quarter from 2.1 percent a year ago as a promising sign. He sees third-quarter churn staying low.

"T-Mobile has clearly done something right based on the fact that so many of their customers are choosing to stay with them relative to a year ago," Feldman said.

T-Mobile's Tuesday announcement that from November 1 it will sell Apple's iPad, with 200 megabytes of free data per month, may put new pressure on its rivals in the fourth quarter.

"That has to be a concern for AT&T, as tablets are their last bastion of growth," said Moffett. Verizon Wireless also depended heavily on Internet devices like tablets for about 40 percent of its 927,000 net new subscribers in the third quarter.

UN-CARRIER OFFENSIVE

T-Mobile kicked off what it calls its "un-carrier" strategy in March by eliminating contracts that lock in consumers to the same phone and service for two years. In July it launched early upgrades letting customers on monthly phone payment plans trade in their smartphones for a new model as often as twice a year.

Verizon Wireless, AT&T and Sprint followed with their own versions of the early upgrade offer, but Verizon and AT&T were criticized by analysts and consumers for charging too much.

Early this month, T-Mobile caused another stir by promising cheaper rates for vacationing customers and consumers calling overseas from the United States. It also accused its rivals of reaping profit margins of 90 percent from international bills.

Analysts say T-Mobile's rivals want to avoid a price war that damages the entire industry. But without a stronger rival response, Deutsche Bank's Feldman says T-Mobile's 2013 target for 1 million to 1.2 million net additions, may be too low.

Sprint, which has been losing customers for several years, is expected to report third-quarter net subscriber losses of more than 313,000 on October 30, according to six analysts.

But Feldman said the industry dynamic could change again around mid-2014 when Sprint -- now 80 percent owned by SoftBank -- is expected to be able to capitalize on network improvements.

"It's the first time in a long time all four carriers will have a pretty compelling network to offer," he said.

COMPETITORS SHRUG

So far AT&T and Verizon have said that intensifying competition is attracting only their lowest-spending customers.

AT&T would not comment directly for the story but its finance chief John Stephens did say on Wednesday's analyst earnings call that the company would handle what he described as the "normal competitive process" very quickly "with a great network, great customer service."

Verizon Chief Financial Officer Fran Shammo dismissed T-Mobile's international plans, saying companies already negotiate cheaper fees than Verizon's official rates. He also shrugged off T-Mobile's broader competitive push.

"I don't feel threatened at all," Shammo told Reuters after Verizon's earnings report October 17. T-Mobile declined to comment.

For now it seems to have the biggest impact on AT&T. But some analysts say the average estimate for T-Mobile customers may be too low and that it could beat Verizon's third-quarter phone subscriber growth of 481,000.

"I think this is going to be the second consecutive quarter where T-Mobile are the phone net-add champion," Feldman said.

(Reporting by Sinead Carew; Editing by Alden Bentley and Frank McGurty)