The latest salvo by

AT&T Wireless

(AWE)

in the wireless pricing wars has analysts scratching their heads: Why would the company choose to lure new customers by promoting low prices rather than new products at a time when the troubled industry can hardly afford a new round of discounts?

The answer may lie in wireless companies' mad scramble to boost new-subscriber figures -- which are closely scrutinized by investors -- no matter what the cost to the company or the industry, some analysts say.

AT&T Wireless last week announced a dramatic price discount to its new high-speed network that seemed to defy logic: As the industry struggles with declining growth, falling income and a heavy debt load, the nation's third-largest wireless carrier chose to use promotional rate incentives to snag subscribers, rather than relying on the strength of its new wireless data services alone.

Analysts panned the move as a short-term play that could lead to long-term woes. Regardless, other companies are likely to follow suit. In fact

Sprint PCS

(PCS)

,

T-Mobile USA

(formerly Voicestream) and

Nextel

(NXTL)

have been trimming prices for weeks.

Price cuts, such as these, could seriously shake the industry's foundations. But that concern is taking a backseat to the perceived importance among investors of adding new subscribers, some analysts suggest.

"No matter where this industry is, even 10 years from now, people are going to look at net

subscriber additions," said J.P. Morgan wireless services analyst Thomas Lee. "It's always going to be an important metric for unit growth. There's no alternative." While Lee said other figures, including average revenue per user, or ARPU, are equally important in valuing wireless companies, he believes net additions will always carry inordinately skewed weight with investors. "It's unfortunate," he said.

Ned Zachar, an analyst at Thomas Wiesel Partners, agrees. "People still place a great deal of importance on

net subscriber additions," he said. "I thought that the emphasis on financial information as opposed to the still-high degree of emphasis on net adds would have changed more quickly than it has. But the market just won't do it."

The impact of reporting fewer new subscribers can be devastating, carriers have learned. For instance, Sprint PCS shares tumbled 26% on June 14, a day after the company told investors it planned to report fewer new subscribers than expected. Meanwhile, AT&T Wireless stock dropped 16% on July 23, after the company told investors it missed new-subscriber forecasts in the second quarter. (AT&T also reported a 91.6% fall in net income, but primarily because the year-earlier income included a one-time gain on a sale of a Japanese unit.)

To be sure, some analysts say wireless companies can survive the price wars. A few studies have shown that ARPU has remained stable -- hovering in the $53 range -- over the past three years, despite actions taken by carriers to cut rates. Alexander Trofimoff, a wireless analyst at Sanford C. Bernstein, said he thinks carriers will be able to offset declining revenues from voice minutes by attracting consumers to new data offerings, which allow users to send and receive pictures or download new games.

AT&T's Plan

AT&T Wireless is doubtlessly hoping this is the case. The company last week launched one of the most drastic moves in the pricing war, discounting its rates by more than 50% on some promotional plans.

AT&T Wireless denies it is offering discounts to grab customers at any cost. Spokesman Mark Siegel said, "I dispute that thesis. We certainly want to increase our subscribers

but the wireless industry is entering a phase of maturity where simply grabbing land ... is not necessarily going to work anymore ... you have to go about the way you grow your business much more shrewdly."

He noted that the promotion pertains only to calls made on the new network and will be in effect for a limited period. He also said the price reduction won't hurt the company's ARPU.

AT&T Wireless is offering a $39.99 plan that delivers 1,000 anytime minutes, as long as the money is spent on AT&T's new high-speed network. It also is offering a separate $99 plan for unlimited minutes to new users. The plans undercut the competition on a price-per-minute basis, offering rates of 4 cents to 8 cents.

More than three years of intense price competition have driven rates down to between 11 cents and 15 cents a minute on average, according to figures provided by Thomas Wiesel analyst Ned Zachar. And the potential damage to wireless companies could be significant, some analysts say.

"In the long term, these adjustments could have a big effect on carriers' financial models," said Alex Rygiel, an analyst at Friedman, Billings, Ramsey, in a research note last week.

Taking Off the Gloves

J.P. Morgan's Lee said carriers may be looking for an easy short-term fix to the industry's problems. "Generally, when they increase promotion, it's because they're having difficulties meeting internal targets," Lee said. The AT&T Wireless move is "very alarming, considering the size of the discount," added Lee. "It's a new network, with high-speed features, and arguably you don't have to discount it."

Indeed, AT&T may have resorted to pricing as a tool because revenues from its data services aren't measuring up, some analysts have suggested. The company has yet to release precise sales from its data services, called mMode, launched earlier this year.

Analysts say revenues from data services contribute around $1 of ARPU on average. "It's been a dollar for a long time, for everyone," Thomas Wiesel's Zachar said. "It tells me they have not found a way to generate the demand or sell the product effectively to date."

AT&T Wireless spokesman Siegel disagrees. "We're very very pleased with how the data services have been received," he said. Siegel declined to elaborate on sales figures for the company's mMode service, citing competitive reasons.

AT&T Wireless certainly isn't the only wireless company to offer rate promotions. T-Mobile recently added 100 minutes to its low-end plan. The company also began offering an unlimited nightly rate. Sprint PCS, meanwhile, recently offered special promotional rates at certain retail locations. Sprint is also offering free data usage for about three months. Even Nextel, which boasts the industry's highest ARPU, at $71 per user, hasn't been immune to pricing pressures: It added about 100 minutes to some of its National Connect plans.

"The gloves are off," said Thomas Wiesel's Zachar. "We're in another round of pretty serious price cutting." So much for those spring promises that the big carriers would trim fat and focus on fixing their finances.

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