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

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.