Mark Lennihan, Associated Press
NEW YORK — When Verizon Wireless started selling the iPhone, AT&T sounded a defiant note, saying that its customers would remain loyal. A year later, it's clear that the Verizon iPhone has crimped AT&T's stride.
Verizon had little problem attracting new customers before it started selling the iPhone. In fact, it was the only wireless carrier that managed to keep up with AT&T's iPhone-fueled growth.
But with the iPhone in its arsenal, the country's biggest wireless company is getting bigger, while No. 2 AT&T Inc.'s growth has slowed precipitously.
On Tuesday, AT&T revealed that it essentially gained no phone subscribers on contract-based plans in the first quarter. That's only happened once before: A year ago, when Verizon launched its version of the iPhone.
Contract-based plans are by far the most lucrative for a phone company, and the number of new customers is an important measure of growth.
AT&T gained a net 187,000 customers on contract-based plans in the January to March period, but these were almost all tablet users, brought in by the launch of the new iPad in March. Even on contract-based plans, tablet customers pay between $15 and $50 per month, whereas smartphone customers often pay more than $100.
By contrast, Verizon last week reported adding 501,000 subscribers on contract-based plans.
Over the last five quarters, Verizon has added nearly three times as many contract subscribers as AT&T. Over the previous two years, the rivals split new subscribers nearly evenly.
The easy gains are over for cellphone companies, now that almost every adult, and many kids, have phones. That means they're stealing subscribers from each other, and in this world, a trend is solidifying: the bigger companies keep stealing from the smaller ones.
For a while, it looked like AT&T and Verizon would both reign at the top. But now, it seems that Verizon, with a boost from the iPhone, is pushing AT&T away from the top of the hill.
AT&T gained a net 726,000 subscribers of all kinds in the first quarter, counting ones on no-contract plans and ones on non-phone devices like the Kindle. That was the lowest figure in eight years, and less than a third of the number of subscribers added in the same period last year.
The head of AT&T's wireless business, Ralph de la Vega, said a drop in sales of e-readers that connect to AT&T's network were behind much of the drop in overall subscribers.
Amazon.com Inc. has been selling Kindle e-readers that use AT&T's network, but its new flagship device, the Kindle Fire, only uses Wi-Fi.
Weak subscriber figures are usually good for a phone company's earnings in the short term, since it doesn't have to subsidize new devices.
The Dallas-based company's net income for the January to March period was $3.6 billion, or 60 cents per share, up 5 percent from $3.4 billion, or 57 cents per share, a year earlier.
Analysts polled by FactSet were on average expecting earnings of 57 cents per share for the latest quarter.
In particular, AT&T saved money by selling fewer iPhones than analysts expected. AT&T subsidizes each new iPhone by hundreds of dollars, hoping to make the money back over time in the form of service fees.
AT&T said it activated 4.3 million iPhones in the first quarter. That was down from 7.6 million in the fourth quarter, when AT&T began selling the iPhone 4S. However, the number was still up from the 3.6 million iPhones AT&T sold in the same quarter a year ago.
Revenue was $31.8 billion, up 2 percent from a year earlier. It matched analyst expectations.
AT&T shares rose $1.27, or 4.2 percent, to $31.88 in afternoon trading. The shares are close to a four-year high of $31.97 hit a month ago.
Macquarie Securities analyst Kevin Smithen said the strong first-quarter earnings could mislead investors. He believes AT&T's profits will shrink this year as it upgrades more handsets, even as it continues to lose market share to Verizon.
Craig Moffett at Sanford Bernstein was more optimistic, saying the first-quarter results demonstrated "the successful hand-off from growth to profitability." It's possible, he said, that AT&T will be able to wring more money out of each wireless subscriber through data usage fees. It also looks like the company is getting better at reining in smartphone subsidies, he said.
Apple Inc. shares fell on AT&T's report, as investors interpreted its iPhone sales as presaging bad news in Apple's earnings report, due after the market close Tuesday.
Apple shares were down $15.35, or 2.7 percent, to $556.35.
Peter Svensson can be reached at http://www.twitter.com/petersvensson