Slowdown rings the Bells

June 16, 2008, 4:13 PM UTC
Fortune

By Scott Moritz

Twin telco titans Verizon (VZ) and AT&T (T) got slapped with downgrades Monday from UBS as the pinch on consumer spending puts a chokehold on business.

“The weak economy is pressuring wireline fundamentals at the Bells more than expected,” UBS analyst John Hodulik wrote in a research note Monday downgrading both shops to neutral from buy. The acceleration of core residential phone line service cancellations is not being offset by growth in new so-called triple play services like broadband and video, he writes.

Among the looming concerns is the sudden slowdown in broadband growth at AT&T as price hikes kick in and competition heats up. And wireless, the showcase growth unit that once masked all the laggard wireline business, is now about to turn ugly, says Hodulik. You can thank AT&T and Apple’s (AAPL) new iPhone for the opening shot on a new subsidy war for big-spending mobile phone subscribers.

“We remain concerned regarding the slowdown in subscriber growth. While pricing has been relatively rational in the marketplace, we believe AT&T’s substantial subsidy on the 3G iPhone takes the competitive environment to a new level.”