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By Sinead Carew
NEW YORK, July 16 (Reuters) - AT&T Inc customers willbe able to upgrade phones once a year instead of waiting twoyears under a new option that involves monthly device paymentsas AT&T defends itself against challenges from T-Mobile US.
AT&T's latest offering, which will not require upfrontdevice fees, comes as the No. 2 U.S. mobile provider strives toregain the market share it has been losing to market leaderVerizon Wireless, and to fight back against tougher competitionfrom smaller rivals like fourth-ranked T-Mobile US.
Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc, is also expected to launch asimilar offer in August, according to a Droid Life blog report.Verizon Wireless declined to comment.
Shares in T-Mobile US fell 3.8 percent and shares in No. 3U.S. mobile provider Sprint Corp fell 3.6 percent afterthe news on Tuesday.
AT&T's offer, which will be available July 26, appeared tobe a direct response to T-Mobile's announcement last week thatits customers can now upgrade smartphones as often as twice ayear.
AT&T will charge customers $15 to $50 per month, dependingon the device, on top of monthly service fees under the newoffering, which does not require a long-term service contract.
By excluding upfront device fees in its plan, AT&T is hopingto trump T-Mobile US, which still requires an upfront payment.
T-Mobile US Chief Marketing Officer Mark Sievert called themonthly phone installments a "trick" to get more money out ofcustomers because it is not changing its monthly service fees.
"If you're going to charge separately for the phone likethey're doing then you need to reduce the price of the service.Otherwise you're paying twice for the same phone," Sievert saidin an interview.
AT&T typically pays hefty upfront subsidies to phone makersso it can offer customers device discounts and tie them intotwo-year contracts. It then recoups the cost of the phone overthe span of the contract through its service fees.
AT&T and T-Mobile, which tried but failed to merge in 2011due to regulatory opposition, are grappling to snare eachother's customers in a market where most people already havesmartphones. T-Mobile has been directly marketing against AT&Tin recent months.
Wells Fargo analyst Jennifer Fritzsche said in a researchnote that AT&T's new option should be positive for the company.
"T-Mobile has clearly been seeing success with its versionof this plan," Fritzsche said, adding that much of T-Mobile'ssuccess "has been at the expense of AT&T."
But since both companies will depend on resales of traded-indevices to help recoup their costs, Citi analyst Michael Rollinsworried that they may lose money if there is a lot moreavailability of second-hand phones.
"The risk to AT&T and T-Mobile US is that the continuedincrease in supply for a secondary market for used devices couldreduce the resale value and increase the cost of this program toany of the participating carriers," Rollins said.
NO UPFRONT FEE, NO SERVICE PRICE CHANGES
Customers under AT&T's new plan would not have to commit toa service contract but would have to sign a 20-month installmentagreement. However, a customer who trades in a phone and startsa new installment plan before 20 months would not have to makethe remaining monthly payments.
For example, an AT&T customer buying the SamsungElectronics' Galaxy S4 would pay $32 per month for20 months for the device along with a monthly service fee andhave the option to trade in the phone after 12 payments.
AT&T customers willing to wait two years for an upgrade canstill follow the company's traditional policy, which involvesbuying the device at a sharp discount with a monthly upfrontpayment in exchange for committing to a two-year contract.
In comparison, T-Mobile US does charge an upfront fee forthe device on top of $10 per month to sign up for its Jumpbranded upgrade option, and installments of up to $20 per monthas well as its monthly service fee.
Smaller rival Sprint, which was recently bought by SoftBankCorp, declined to say if it would also follow itsrivals with an upgrade policy change.
Spokesman Doug Duvall said "the driving force behind theupgrade policy remains balancing customer wants and needs witheconomic feasibility."
AT&T shares closed up 33 cents, or 0.9 percent at $35.88 onNew York Stock Exchange, where T-Mobile shares fell 97 cents, or3.8 percent, to $24.37. Sprint shares fell 24 cents, or 3.5percent, to $6.48, and Verizon ended up 32 cents, or 0.64percent, at $50.28, also on NYSE.
