AT&T sets iPhone record - but Verizon is lurking

NEW YORK (CNNMoney.com) -- The iPhone 4 helped drive AT&T's wireless division to soaring growth in the past quarter, but Verizon may ultimately be the big winner.

AT&T activated 5.2 million iPhones in the third quarter, the company announced Thursday. That set a record for iPhone activations and represented a stunning 62% growth over the previous sequential quarter -- which, at the time, was also a record high.

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That helped AT&T add a net 2.6 million new wireless customers during the quarter, half of whom were new iPhone customers. Those numbers are especially impressive in a year when finding new subscribers has been more difficult for carriers than it was in the past. By comparison, Verizon added 1 million new subscribers, the carrier said Friday.

AT&T's third-quarter wireless revenues soared 11%, to $15.2 billion. Meanwhile Verizon's rose just 6%, to $16.3 billion.

But AT&T's momentum could soon come to a screeching halt. It has been widely speculated that AT&T is about to lose its exclusive hold on the iPhone at the end of the year, and that Verizon will start selling the smartphone beginning in early 2011.

That could swing the balance of power in the mobile sector. When Verizon gets the iPhone, as many as 6 million of AT&T's iPhone subscribers could defect, according to a forecast by Drake Johnstone, a Davenport & Co. analyst. AT&T has been plagued with network problems in major cities like New York and San Francisco, and Verizon is debuting its 4G network with broadband-like speeds at the end of the year.

Until 2007, Verizon had been consistently adding more new customers than AT&T each quarter. That stopped when AT&T got exclusive rights to sell the iPhone three years ago. Johnstone expects the pendulum to swing back.

AT&T and Verizon Wireless are the nation's two largest mobile carriers, by far, and competition between the companies is fierce. Their networks are in a virtual dead heat: Verizon is just barely on top with 93.2 million wireless customers, compared to AT&T's 92.8 million subscribers.

But Verizon is doing that without the benefit of the nation's most popular and talked-about smartphone.

That's not to say Verizon doesn't have a strong lineup -- just this quarter, the carrier launched three new hot-selling Android phones, including the Motorola Droid X, the Motorola Droid 2, and the Samsung Fascinate.

To boost its lineup, AT&T launched the BlackBerry Torch last quarter, as well as several new Android phones. It will also beat Verizon to the punch by selling three Microsoft (MSFT, Fortune 500) Windows Phone 7 phones during the current quarter.

But those phones aren't proven commodities like Apple's (AAPL, Fortune 500) iPhone. The Torch received only mixed reviews, and AT&T's Android phones aren't on par with most of Verizon's offerings. Windows Phone 7 has generated a significant amount of buzz, but it's far from a sure thing.

Still, it's too soon to write requiems for AT&T. A growing number of smartphones are becoming competitive with Apple's groundbreaking device.

"While we believe that AT&T could lose millions of customers to Verizon if Verizon begins selling the iPhone in 2011, AT&T should cope with the loss of iPhone exclusivity better in 2011 than a few years ago," Johnstone said. "It will be able to market a wide array of attractive smart phones, including the iPhone."

Meanwhile, AT&T made a big move last quarter to lock in much of its iPhone customer base through 2012. In July, AT&T gave customers whose contract was set to expire at any time in 2010 a chance to upgrade to the iPhone 4 at no extra cost.

Every good thing comes at a price. AT&T's wireless expenses grew to $11.7 billion in the quarter, up 15% over the same period last year, thanks to the heavy subsidy that the wireless company pays to offer the iPhone 4.

Verizon had $11.3 billion of wireless expenses in the quarter, but that was up just 3% from the same time last year. That'll be sure to rise when the iPhone comes along.

After falling 1% on Thursday, following its earnings announcement, shares of AT&T (T, Fortune 500) were flat on Friday. Verizon's (VZ, Fortune 500) shares were down 1% Friday.