AT&T preps for Verizon iPhone battle by locking in millions

NEW YORK (CNNMoney) -- AT&T locked in 4.1 million iPhone customers last quarter ahead of a looming battle royale with Verizon over Apple's iconic smartphone, the carrier reported Thursday.

The fourth quarter marked the last full quarter of AT&T's iPhone exclusivity agreement with Apple (AAPL, Fortune 500). Verizon will begin taking pre-orders for the phone on Feb. 3 and selling it in stores on Feb. 10.

That made AT&T's recent iPhone sales all the more significant, because they effectively lock customers into two-year contracts with pricey termination fees. If a current iPhone 4 customer wishes to defect to Verizon next month, it will cost $325, less only $10 for each month that has passed since the contract began. Plus, customers will need to splurge on an all-new iPhone for Verizon's service, which uses a network technology that is incompatible with AT&T's iPhone.

Verizon hinted Tuesday that it expects to sell in the ballpark of 11 million iPhones in 2011. To entice AT&T customers to join its ranks, Verizon said it would offer an unlimited data plan on the iPhone for a limited time.

But just 2.5 million iPhone customers are expected to cancel their AT&T service and switch to Verizon, according to a Yankee Group study.

AT&T has gone on the offensive in the past year in anticipation of its loss of iPhone exclusivity. To boost its lineup, AT&T made deals with Research in Motion (RIMM) and Microsoft (MSFT, Fortune 500) to be the exclusive U.S. vendor of the BlackBerry Torch and Windows Phone 7 devices. The company also offered early upgrades to its customers to entice them to purchase an iPhone 4 ahead of Verizon's launch.

AT&T's iPhone lock-in will prove to be important down the road, because the carrier had an otherwise tepid quarter.

AT&T added just 400,000 new wireless customers under contract, compared to 872,000 for Verizon, which reported its quarterly finances on Tuesday. Customers under contract are the most valuable to wireless companies, because they tend to bring in more revenue and they're more loyal to the company.

Still, the news wasn't great for Verizon either, which added 1.1 wireless customers under contract during this quarter a year ago.

Lowell McAdam, Verizon's chief operating officer, said he was disappointed by the results, but he chalked them up to people holding out for the iPhone. Though Verizon waited until earlier this month to announce it would start selling the iPhone, it had been the subject of several news reports and rumors for many months.

Wireless revenue was nevertheless up for both carriers: Verizon's grew 5.7% to $16.1 billion, and AT&T's rose 9.9% to $15.2 billion.

The networks are also both neck-and-neck for the title of most U.S. wireless customers: Verizon had 94.1 million to end the quarter, and AT&T had 95.5 million (see correction below).

But in all, both companies had pretty lousy quarters. AT&T posted earnings of $1.1 billion, down 60% from the same period last year, due mostly to a new method of accounting for its pension costs.

Excluding one-time items, the wireless company posted earnings per share of 55 cents, just edging out the 54-cent median estimate of analysts polled by Thomson Reuters.

Sales rose 2.1% to $31.5 billion, beating Wall Street's estimate of $31 billion.

For Verizon, quarterly earnings were up to $4.7 billion, from $2.4 billion a year ago -- though that rise was due the same rejiggering of its pension accounting. Earnings per share were 54 cents, missing Wall Street's forecast of 55 cents.

Sales fell 2.6% to $26.4 billion, short of analysts' consensus estimate of $26.5 billion.

Shares of Verizon (VZ, Fortune 500) have risen more than 3% since it announced its earnings on Tuesday morning, but AT&T's (T, Fortune 500) shares took a 3% beating Thursday.

Correction: An earlier version of this story incorrectly reported that Verizon had 102.2 million customers at the end of the fourth quarter. Verizon had 94.1 million customers and served 102.2 million connected devices -- some customers have more than one Verizon device.