The Real Reason AT&T Is Going to War With T-Mobile

AT&T goes hand-to-hand in its battle with T-Mobile, but there's a strategic rationale for its latest move.

Jan 6, 2014 at 10:15AM

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

As we kick off the first full week of 2014, stocks opened higher this morning, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) up 0.01% and 0.07%, respectively, at 10:15 a.m. EST.

On Friday, Dow component AT&T (NYSE:T) launched a fresh salvo at T-Mobile (NASDAQ:TMUS), offering its rival's customers up to $450 to switch wireless providers. The offer pre-empts what is expected to be a similar competitive offer from T-Mobile in the next few days. T-Mobile has long been a thorn in AT&T's side, aggressively going after its customers, so this ratcheting up of hostilities is not unexpected. However, AT&T may have a longer-term strategic motive to complement the tactical aspect of its new plan.

These are the details of AT&T's offer: T-Mobile customers will receive a $200 credit per line to switch and up to $250 to trade in their current smartphone (depending on model and condition). However, there is a bit of smoke and mirrors going on here, as the headline $450 incentive isn't as attractive as it appears. Indeed, customers who take advantage of the trade-in will not have access to subsidized handsets; instead, they must adopt AT&T's Next Plan, which has users paying the full price of the phone in monthly installments. (Alternatively, customers can keep their T-Mobile phone, coupled with a slightly cheaper AT&T plan.)

T-Mobile's customer-friendly strategy of introducing simpler, lower-cost plans is working: The Wall Street Journal reported that the company managed to add more than 1 million lucrative contract customers last year, many of whom migrated from AT&T. Furthermore, AT&T's move will have an impact on profits: Credit Suisse analyst Joseph Mastrogiovanni estimated it could reduce earnings per share by 1%-2%.

Still, there are broader considerations at stake here: Sprint (NYSE:S), which is controlled by Internet conglomerate Softbank, is reportedly preparing a bid for T-Mobile. Regulators rebuffed AT&T's 2011 bid for T-Mobile on antitrust grounds. FCC Chairman Tom Wheeler reiterated that stance recently when he said that "the mobile business is today, with four carriers, a competitive business, and it's important it stay that way."

By playing into T-Mobile's ground war at limited expense, AT&T contributes to cementing regulators' view that T-Mobile ought to remain independent. Better a small thorn in its side than a much bigger one in the shape of a T-Mobile/Sprint tie-up -- particularly with Softbank's swashbuckling CEO, Masayoshi Son, angling to make his company the No. 1 mobile Internet company in the world.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

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Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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