By Sinead Carew
NEW YORK, Jan 3 (Reuters) - AT&T Inc on Friday offeredcustomers of No.4 U.S. mobile provider T-Mobile U.S. Inc a $200 credit to switch to its service, firing thefirst volley this year in what may become a price war thatbenefits consumers but plays havoc with profits across theindustry.
AT&T, the No.2 U.S. mobile provider, announced the promotionafter months of direct marketing against it by T-Mobile, and inanticipation of a new offer from its smaller rival on Jan. 8.
The news depressed shares in T-Mobile and Sprint Corp - which have been rallying in recent weeks on optimism aboutpotential consolidation - and to a lesser extent industry leaderVerizon Communications.
The move could kick off a year of discounts from U.S.wireless operators, who are increasingly dependent on price tocompete because they all offer similar phones and any networkadvantages are hard to prove, according to analysts.
MoffettNathanson analyst Craig Moffett described AT&T's moveas the "early makings of a price war" that would boost customerswitching, also known as churn, and in turn hurt profits.
"Everybody's fighting for market share because there simplyisn't an organic market share left to be had," Moffett said."The natural upshot to any strategy that pays customers tochange service is higher churn."
Analysts also worry that No. 3 U.S. rival Sprint, which hasbeen losing customers for years, will unveil dramatic promotionsin 2014 as its new 80 percent owner, SoftBank Corp, isexpected to push Sprint to regain lost ground.
TOOTH AND NAIL
AT&T's move may also bolster U.S. regulators' convictionthat the industry is healthier with four national rivals, makingit difficult for SoftBank to realize its reported ambitions tomerge Sprint with T-Mobile, analysts said.
After failing to sell itself to AT&T in 2011 because ofregulatory opposition, T-Mobile has been fighting tooth and nailwith its one-time suitor. It halted four years of subscriberlosses by criticizing its rivals and selling itself as moreconsumer-friendly with lower prices and more flexibility.
T-Mobile, which is 67 percent owned by Germany's DeutscheTelekom AG, posted two quarters of subscriber growthas a result of the promotions, and trumped rivals AT&T, VerizonWireless and Sprint in phone customer growth.
In early December, AT&T cut service fees for customers whopay for their phones in installments due to pressure fromT-Mobile, the first operator to offer this option.
AT&T is seen as the most vulnerable to T-Mobile's attacksbecause both companies use the same network technology, makingit easier for their consumers to switch.
While analysts had expected Verizon Wireless and AT&T to shyaway from any aggressive responses to T-Mobile, Credit Suisseanalyst Joseph Mastrogiovanni said in a research note they nowappeared to be under more pressure to discount.
"While the carriers try to remain rational while tweakingtheir plans and promotions, there is no doubt that they feel theneed to get more competitive," Mastrogiovanni said. He estimatedAT&T's latest move could cut its earnings per share by 1 to 2percent depending on T-Mobile's response.
Citi analyst Michael Rollins said T-Mobile's next move couldalso prompt responses from Verizon Wireless as well as Sprint.
T-Mobile's outspoken Chief Executive, John Legere, has beenbuilding up anticipation for a new offer his company will unveilat the Consumer Electronics Show in Las Vegas next week.
In a New Year's Day tweet, he listed winning over familyplan customers as a major goal for 2014, prompting speculationthat he will announce discounts aimed at families at CES.
Many analysts say that to maintain its momentum it iscrucial for T-Mobile to lure entire families from AT&T, whichsays the vast majority of its customers are in family plans.
Legere teased AT&T CEO Randall Stephenson after Friday'snews, questioning whether he thinks AT&T can really buy backcustomers who had moved to T-Mobile.
He also described the offer as a "desperate move by AT&T onthe heels of what must have been a terrible Q4" and said, "I'mflattered that we have made them so uncomfortable!
Analysts also speculated that T-Mobile's January offer mayinvolve issuing credits covering early contract-termination feesfor customers switching from AT&T contracts .
This may have led AT&T make the $200 offer per line for alimited-time, to T-Mobile customers who switch to AT&T, startingon Jan. 3. The per-line credit would be on top of another creditof up to $250 for customers who trade in their smartphone. Whiletrade-in values vary based on the phones traded, AT&T said thatmany of the latest phones will qualify for the $250 credit.
Independent telecommunications analyst Jeff Kagan said thenews was a sign of a "real boxing match" between AT&T andT-Mobile. Customer reaction to AT&T's plan could show howsustainable T-Mobile's recent customer growth will be.
"That's what this AT&T plan could spell out," he said.
On the New York Stock Exchange T-Mobile shares closed off$1.09, or 3 percent, at $32.28 and Sprint shares fell 4 percentto $9.94. Verizon shares fell 1.2 percent to $48.42 and AT&Tshares finished down 15 cents at $34.80.
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