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In a move to cut expenses, AT&T, Inc. (T - Analyst Report) has extended time on new mobile upgrades available through subsidized rate plans for contract customers.  Subscribers will now have to wait for 24 months instead of 20 months to avail subsidized upgrade on their new phones. The term will be levied on contracts ending Mar 2014 or afterward. The initiative would bode well for the company’s cost structure as it spends millions of dollars in offering premium devices at subsidized rates.

While smartphones are delivering a strong growth momentum in the wireless segment, high marketing and associated subsidy costs have constrained margins. AT&T is currently pays hefty subsidies on premium handsets like Apple Inc.’s (AAPL - Analyst Report) iPhone, which can go as high as $300 per phone, creating a significant cost headwind to the company.

Further, AT&T remains challenged by aggressive pricing plans of direct competitors such as Verizon Communications (VZ - Analyst Report) and Sprint Nextel (S - Analyst Report). As a result, the company has been offering discounts on pricing plans, which is another threat to its profitability. In addition, smaller wireless carriers such as Deutsche Telekom’s T-Mobile and Leap Wireless also offer cost effective voice and data plans. This may negatively influence AT&T’s high-end handset sales and challenge subscriber retention.

However, we believe these cost headwinds can largely be mitigated given the company’s solid financial position backed by its foothold in the U.S. wireless market and well established brand value in the industry.  In addition, we also believe that over the long term, higher ARPU from smartphone users and full utilization of LTE network capacity by migration of customers from 3G to 4G networks are expected to mitigate the operating cost headwinds created due to higher subsidies on smartphones. Further, equipment pricing is expected to remain more competitive give the increasing number of smartphones in the market, which will also lower the cost of equipment selling.   

Currently,  AT&T retains a Zacks Rank #3 (Hold).

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