NEW YORK (Reuters) - The smartphone was the weapon of choice in the third-quarter battle between Verizon Wireless, AT&T Inc and Sprint Nextel Corp for high-value customers who are happy to pay extra for wireless data service.
AT&T, the exclusive U.S. provider of Apple Inc's iPhone, is expected to trump its rivals in subscriber growth when the major telecommunications companies unveil quarterly results over the coming days. Apple has already said it sold 14.1 million iPhones worldwide for the period.
While trailing AT&T, Verizon Wireless isn't exactly hurting for new subscribers, thanks to its sale of phones based on Android, Google Inc's increasingly popular software.
And even Sprint, which has struggled for years to stem losses of valuable monthly bill-paying customers, was able to put up a good fight in the quarter with the help of HTC Corp's Evo phone, which makes use of the latest generation of high-speed mobile data services.
"You've probably seen an acceleration of smartphone demand in the third quarter," said Pacific Crest analyst Steve Clement.
Since the vast majority of the U.S. population already own phones, all the U.S. wireless carriers are now focused on convincing consumers to upgrade to more advanced phones that come with obligatory monthly fees for wireless data services.
Having the latest hot phone is a way for operators to boost revenue and tempt rivals' subscribers to switch services.
Verizon and AT&T shares have risen since midyear amid increasing investor confidence in smartphone sales and an easing of nervousness around the impact of economic weakness.
Verizon's 28 percent share price increase beat a 17 percent increase at AT&T, as reports emerged that AT&T would lose iPhone exclusivity in the first quarter.
IPHONE, DROID, EVO
AT&T, due to report results on October 21, is expected to lead in the growth of valuable postpaid customers who pay monthly bills, with the average analyst expectation for more than 716,000 net additions, according to six analysts contacted by Reuters.
Verizon, a venture of Verizon Communications Inc and Vodafone Group Plc, is expected to add 580,500 when it reports on October 22 and Sprint is seen losing 173,500 postpaid customers when it reports October 27, according to the analysts.
Analysts noted that AT&T and Verizon Wireless had to fight harder to steal Sprint customers this time around. Sprint, they said, benefited from both the Evo and its cheaper monthly fees for wireless data services like texting and mobile web, which drew cost- conscious customers to Sprint.
"Sprint's becoming a much more credible competitor than they were a year ago," said Barclay's analyst James Ratcliffe, who sees Sprint reporting a third-quarter loss of 100,000 postpaid customers on October 27, compared with a loss of 800,000 in the same quarter a year ago.
"All the evidence suggests that Evo's done quite well," said Ratcliffe, calling it Sprint's first strong flagship phone in some time.
But Sprint's rivals have been busy, too. Verizon Wireless is already expected to kick off its next generation 4G services in the fourth quarter with data cards for fast wireless connections to laptops. It will follow with handsets early in 2011.
Verizon is also heavily promoting Android phones from Motorola Inc and HTC, helping make Android the U.S. smartphone best seller in the second quarter [ID:nN04255464] even before Motorola's flagship Droid X appeared on the scene.
Motorola is seen reporting a total of 9.1 million phones sold in the third quarter, including 3.7 million Android phones, according to Gleacher analyst Mark McKechnie.
Many investors are betting that Verizon will push back more against AT&T in the first quarter next year when analysts expect it to start selling iPhone.
In the meantime, AT&T is seen activating about 4.8 million iPhone customers in the third quarter, well ahead of the record 3.2 million customers it added in the year-earlier quarter.
One drawback to strong iPhone sales is an expectation for a dip in profits, as AT&T pays a hefty subsidy to Apple for each iPhone it sells. As a result, a big quarter for iPhone sales means more upfront costs for AT&T.
Barclay's Radcliffe recently lowered his estimate for AT&T's profit margin to 40.5 percent from 41.4 percent of service revenue. In comparison, the analyst expects Verizon Wireless to produce a margin of 45.5 percent, even after lowering his estimate by 0.4 percentage point due to strong smartphone sales to its customers.
However, investors will likely forgive AT&T's profit dip because big iPhone sales mean that AT&T has locked in a large number of customers to its network for two years, which would be of particular importance should Verizon start selling iPhone.
"Locking up the customers on new two-year contracts is certainly good," said Hudson Square Research analyst Todd Rethemeier, who also expects margin pressure to ease after the iPhone 4's first full quarter of sales.
"I think you'll see in the fourth quarter, margins will improve. The first quarter is the big hit. Then it settles," he said.