By Sinead Carew
NEW YORK (Reuters) - AT&T Inc customers will be able to upgrade phones once a year instead of waiting two years under a new option that involves monthly device payments as AT&T defends itself against challenges from T-Mobile US.
AT&T's latest offering, which will not require upfront device fees, comes as the No. 2 U.S. mobile provider strives to regain the market share it has been losing to market leader Verizon Wireless, and to fight back against tougher competition from smaller rivals like fourth-ranked T-Mobile US.
Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc, is also expected to launch a similar 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. 3 U.S. mobile provider Sprint Corp fell 3.6 percent after the news on Tuesday.
AT&T's offer, which will be available July 26, appeared to be a direct response to T-Mobile's announcement last week that its customers can now upgrade smartphones as often as twice a year.
AT&T will charge customers $15 to $50 per month, depending on the device, on top of monthly service fees under the new offering, which does not require a long-term service contract.
By excluding upfront device fees in its plan, AT&T is hoping to trump T-Mobile US, which still requires an upfront payment.
T-Mobile US Chief Marketing Officer Mark Sievert called the monthly phone installments a "trick" to get more money out of customers because it is not changing its monthly service fees.
"If you're going to charge separately for the phone like they're doing then you need to reduce the price of the service. Otherwise you're paying twice for the same phone," Sievert said in an interview.
AT&T typically pays hefty upfront subsidies to phone makers so it can offer customers device discounts and tie them into two-year contracts. It then recoups the cost of the phone over the span of the contract through its service fees.
AT&T and T-Mobile, which tried but failed to merge in 2011 due to regulatory opposition, are grappling to snare each other's customers in a market where most people already have smartphones. T-Mobile has been directly marketing against AT&T in recent months.
Wells Fargo analyst Jennifer Fritzsche said in a research note that AT&T's new option should be positive for the company.
"T-Mobile has clearly been seeing success with its version of this plan," Fritzsche said, adding that much of T-Mobile's success "has been at the expense of AT&T."
But since both companies will depend on resales of traded-in devices to help recoup their costs, Citi analyst Michael Rollins worried that they may lose money if there is a lot more availability of second-hand phones.
"The risk to AT&T and T-Mobile US is that the continued increase in supply for a secondary market for used devices could reduce the resale value and increase the cost of this program to any 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 to a service contract but would have to sign a 20-month installment agreement. However, a customer who trades in a phone and starts a new installment plan before 20 months would not have to make the remaining monthly payments.
For example, an AT&T customer buying the Samsung Electronics' Galaxy S4 would pay $32 per month for 20 months for the device along with a monthly service fee and have the option to trade in the phone after 12 payments.
AT&T customers willing to wait two years for an upgrade can still follow the company's traditional policy, which involves buying the device at a sharp discount with a monthly upfront payment in exchange for committing to a two-year contract.
In comparison, T-Mobile US does charge an upfront fee for the device on top of $10 per month to sign up for its Jump branded upgrade option, and installments of up to $20 per month as well as its monthly service fee.
Smaller rival Sprint, which was recently bought by SoftBank Corp, declined to say if it would also follow its rivals with an upgrade policy change.
Spokesman Doug Duvall said "the driving force behind the upgrade policy remains balancing customer wants and needs with economic feasibility."
AT&T shares closed up 33 cents, or 0.9 percent at $35.88 on New York Stock Exchange, where T-Mobile shares fell 97 cents, or 3.8 percent, to $24.37. Sprint shares fell 24 cents, or 3.5 percent, to $6.48, and Verizon ended up 32 cents, or 0.64 percent, at $50.28, also on NYSE.
(Reporting by Sinead Carew; Editing by Maureen Bavdek)