Sprint expected to undercut rivals' call plans

By Sinead Carew
Reuters
Wednesday, February 20, 2008; 12:35 PM

NEW YORK (Reuters) - No. 3 U.S. mobile service provider Sprint Nextel Corp (S.N) is expected to offer flat-rate calling plans at up to a 40 percent discount to its rivals, hurtling the industry into a price war, analysts said on Wednesday.

The two largest U.S. mobile service providers, Verizon Wireless and AT&T Inc (T.N), on Tuesday unveiled $99.99-a-month plans for unlimited calls. T-Mobile USA went a step further by including text messaging in that price.

Sprint has yet to respond and spokeswoman Leigh Horner declined comment on any plans for future offers, but analysts say the company could be considering an unlimited calling plan for as low as $60 a month to stem customer defections.

Wall Street is worried about a looming price war, even though Tuesday's new plans were not seen in and of themselves to have a big impact on service revenue as only about 5 to 10 percent of consumers now pay more than $100-a-month for calls.

A response from Sprint may force AT&T and Verizon Wireless, a venture of Verizon Communications (VZ.N) and Vodafone Group Plc (VOD.L), to cut their prices or face losing customers.

"Our bigger concern rests with Sprint's plans and the potential for future additional competitive responses," Robert W. Baird analyst Will Power wrote in a research note.

Verizon shares fell 5 percent to $33.52 on the New York Stock Exchange after falling more than 6 percent on Tuesday. AT&T shares fell 7 percent to $33.10, also on the NYSE, after finishing down more than 5 percent on Tuesday.

Sprint fell almost 6 percent to $8.71 after closing down 2.6 percent on Tuesday.

"It's sinking in how bad this could be for the industry," said Todd Rethemeier, an analyst for SurTerre Research, which is associated with Soleil Securities. Rethemeier owns some shares in

AT&T.

If the new plans spark more rate cuts including a $70 plan from Sprint, AT&T and Verizon could see their wireless average monthly revenue per user be flat in 2008 and fall by 1 to 3 percent in 2009, said Rethemeier.

Unless slowing subscriber growth cuts costs in a market where about 85 percent of subscribers already have cell phones, the fall in revenue could hurt carrier margins, he said.

Rethemeier said the unlimited price plans could also exacerbate any threat of a slowing economy on the fixed-line phone business of AT&T and Verizon.

"In a weak economy we could see a scenario where more people cut the chord at home and go completely wireless," he said. "These plans actually encourage that."

PROFIT AND REVENUE RISK

UBS analyst John Hodulik cut his earnings, revenue and share price estimates for AT&T and Verizon, citing a belief that Sprint is considering launching an unlimited calling plan with a monthly fee of $60 to $80.

He said the share price declines on Tuesday meant investors already assume Sprint will sell an $80 plan. But he said Sprint's response may be even more aggressive.

"Additional downside in the shares likely exists if Sprint launches an unlimited plan for $60 per month -- a real possibility given the current state of competition," Hodulik wrote in a research note.

He said that while he doubts that AT&T or Verizon would match a $60 to $80 plan, he sees the introduction of plans in that range hurting their customer growth and revenue.

As a result, he cut his 2008 earnings estimate for Verizon to $2.63 a share from $2.70 and reduced his AT&T estimate to $3.17 from $3.19.

Hodulik expects consolidated revenue growth at AT&T and Verizon to slow as a result of the new price competition. For AT&T he expects revenue growth to fall to 7 percent in 2009 from 11 percent in 2008 and 15 percent in 2007.

At Verizon, he sees revenue growth slowing to 3.8 percent in 2009 from 5 percent in 2008 and 5.8 percent in 2007.

Hodulik also cut his 12-month share price target for Verizon to $41 from $51, and to $41 from $49 for AT&T.

Bear Stearns analyst Phil Cusick said in a research note that the share price drops show real concern that AT&T and Verizon will have to offer deeper price cuts.

"We believe the stock sell-off implies that Sprint will undercut very aggressively and that AT&T and Verizon will eventually be forced to respond," he said.

If Sprint charges $75 a month for unlimited calls, it would only gain a slight edge over rivals, Cusick said.

"If instead Sprint prices closer to $60 for unlimited voice, that would create much more marketing stir and be a real differentiator, but would risk an eventual response from competitors," he said.

(Editing by John Wallace, Phil Berlowitz)