Tech investors may find it hard not to track the telecom industry these days. In what could be a dull segment of the market for investing, the sparring match between AT&T (NYSE:T) and T-Mobile (NASDAQ:TMUS) has kept things pretty interesting.
AT&T's latest punch came over the weekend when it announced that shared data, talk, and text family plans would start at $130 per month for two smartphones, plus $15 for each additional device.That may not sound very interesting, until you consider that the $160 monthly price for a family of four is 20% less than AT&T previously charged. That's quite a price decrease, and it's likely a reaction to T-Mobile's aggressive marketing moves.
T-Mobile has been throwing everything it has at the competition for more than a year, and it seems to be paying off. The company has eliminated service contracts, gives free tablet data for life, added free international roaming, and most recently offered up to $650 per line for customers to switch from rivals to its network.
That last move has likely fueled AT&T's most recent price cut. In the past T-Mobile hemorrhaged customers to competitors including A&T and Verizon Communications, but in fourth-quarter 2013 it added 869,000 postpaid subscribers. With T-Mobile's efforts paying off, AT&T's new plan is aimed at keeping existing customers happy with the plan they've got.
So how will AT&T pay for its price cut?
As Fierce Wireless pointed out, an analyst at New Street Research thinks the price cut will lower AT&T's EBITDA by 1% to 2%. To offset the drop, the company would either have to increase gross subscribers by 500,000 to 1.3 million or decrease its churn rate. In the last quarter of 2013, the company gained 566,000 wireless postpaid subscribers and had its lowest fourth-quarter postpaid churn rate of 1.11%.
Lowering the churn rate below its current figure could prove difficult, not just because it's already low but also because of all the additional competition from T-Mobile. To its credit, AT&T's lowest ever fourth-quarter churn rate may prove it was able to fight off T-Mobile relatively well in that timespan.
Increasing customers in order to pay for AT&T's new pricing strategy won't be easy, as T-Mobile's aggressive $650 per line offer seems targeted directly at AT&T. In the fourth quarter, AT&T's net postpaid subscriber growth dropped about 20%, year over year. T-Mobile's advertising initiative has been relentless -- the company bought several major commercial spots at the Super Bowl to push its no-contract marketing.
With 2014 just getting started, we're likely to see a lot more back-and-forth between the two companies this year. Though T-Mobile is certainly a scrappy competitor, it's fighting an uphill battle.
AT&T investors need to keep an eye on how willing the company is to sacrifice revenue in order to retain its current customers. With the company seemingly frightened by T-Mobile's moves, it'll have to balance aggressive competitive strategies without losing sight of long-term growth.
Fool contributor Chris Neiger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.