iPhone Price War Whacks AT&T, Verizon

 |  Includes: AAPL, T, VZ
by: Market Blog

By David Berman

U.S. telecom services stocks certainly stood out on Thursday, and not in a good way. Both Verizon Communications Inc. (NYSE:VZ) and AT&T Inc. (NYSE:T) were down more than 3 per cent in afternoon trading after signs emerged of a price war on Apple Inc.'s (NASDAQ:AAPL) iPhone.

AT&T, which is the exclusive network operator for the iPhone until an expected launch by Verizon early this year, made an early move to head off the competitive threat by cutting its price on the previous generation phone to $49 (U.S.) from $99. It held its price on the newest version of the iPhone at $299.

The price cut is great news for U.S. consumers – well, those who don’t mind forgoing the latest models – but has freaked out investors that a wider price war is looming. The news comes as both AT&T and Verizon (full disclosure: I own shares in this company) are set to report their fiscal fourth quarter earnings at the end of this month.

Last quarter, both companies turned in financial results that topped expectations among analysts, either on the earnings side or the revenue side. However, far more scrutiny is being paid to their respective wireless divisions, which show more promise as the business in wired home phones stagnates.

In particular, investors and analysts are looking at the pace at which companies are attracting new wireless customers – and here, the picture is mixed. Customers continue to flock to wireless phones, but at a somewhat softer than expected pace. Last quarter, Verizon added 584,000 new wireless contract customers, but fell shy of at least two analysts’ forecasts for more than 625,000 additions. AT&T added 745,000 customers, but also fell shy of some forecasts.

Meanwhile, the iPhone is developing into a key battleground: AT&T’s iPhone activations last quarter rose 63 per cent, year-over-year.

Until Thursday’s setback, U.S. telecom stocks had been performing well. The S&P 500’s telecom services index of nine stocks rose 19 per cent last year, after factoring in dividends. That performance beat the broader market.

However, perhaps the Canadian market illustrates that rising competition isn’t necessarily a bad thing for companies. Investors had been put off by initially by the threat of new entrants into the once-cozy Canadian wireless space. But telecom stocks surprised doubters in 2010, rising 22.4 per cent after factoring in dividends.

Disclosure: None