Cost-cutting and the lure of the iPhone softened the effect of the weak economy at AT&T Inc., helping the country's biggest telecommunications carrier beat analyst estimates for the first quarter.

AT&T said Wednesday it earned more than $3.1 billion, or 53 cents per share, in the first three months of 2009, down 9.7 percent from almost $3.5 billion, or 57 cents per share, a year earlier.

The earnings were reduced by 5 cents per share for increases in noncash pension and retiree expenses. Excluding that item, the earnings were 58 cents per share. The average estimate of analysts polled by Thomson Reuters, which generally excludes items, was for earnings of 48 cents per share.

Despite strong wireless sales, AT&T says revenue slipped to $30.6 billion from $30.7 billion a year ago. That was short of analyst expectations at $31.1 billion.

Revenue fell because the weak economy exacerbated the long-running decline of AT&T's landline business. Sales of traditional fixed phone service fell 12.2 percent to $8.7 billion.

AT&T shares rose 32 cents, or 1.3 percent, to $25.60 in morning trading.

Even as revenue declined, AT&T improved its overall profit margin slightly, helped by the continuing process of integrating BellSouth Corp., which it bought in 2006. It has also reduced its work force by 8,000 people since the beginning of the year, mainly by cutting jobs on the wired side of the business. It had 294,600 employees at the end of the quarter.

AT&T added a net 875,000 customers under contract in the first three months of the year, hundreds of thousands more than expected by analysts. Of the new customers, about three-quarters chose the iPhone, for which AT&T is the exclusive U.S. carrier.

The iPhone has been a drag on AT&T's earnings since last summer, when the latest model, the "3G," launched. AT&T has been subsidizing each phone by hundreds of dollars, with the aim of making its money back on service fees, since iPhone users pay 60 percent more per month than other customers.

That strategy started to pay off in the first quarter. Margins in the wireless business are now back almost to where they were before the launch of the iPhone 3G, despite the sale of 1.6 million iPhones in the quarter. The sales figure includes customers switching from other AT&T phones. Sales were down from 1.9 million from the fourth quarter, but were strong for a non-holiday quarter without a new iPhone model.

Apple Inc.'s phone also helped AT&T avoid getting caught up in a trend analysts are expecting to see this year: more customers signing up for prepaid service than for expensive contract-based plans. Only a quarter of new subscribers at AT&T chose prepaid in the quarter, compared to more than half at T-Mobile USA.

Two segments of AT&T's landline business also did well. Its cable-like TV service, U-Verse, signed up 284,000 subscribers, for a total of 1.3 million. It added 359,000 subscribers to wired broadband, a performance that bucks years of declining numbers in a saturating market.

LAS VEGAS--Realizing that cellphone sales will eventually slow in the U.S., AT&T and Verizon are racing to connect everything from netbooks to electronic readers to their networks.

Both companies insist they are receptive to any idea as long as it doesn't harm their networks. Judging from two possible future products--a wireless-enabled dog collar and an automatic cow milking system--the telcos truly are thinking outside the box. (See "AT&T And Verizon's Start-Up Mentality." )

Glenn Lurie, president of AT&T's ( T - news - people ) emerging-devices unit, would like to support dog collars on his company's network. Lurie imagines the collars would incorporate small wireless modules that beam data to a Web site so owners could track the dog's location if it got lost or loose.

"Think how many people have pets that they treat like children," Lurie says. "People laugh about the idea, but it really is a viable application." He estimates that consumers would pay up to $100 a year for such a service.

Verizon ( VZ - news - people ) is considering supporting an application that would manage a dairy farm's automatic milking system, says Tony Lewis, head of the company's open development unit. The application would use Verizon's cellular network to collect status updates on the milking machines.

The company has already approved a device that tracks the whereabouts of prison inmates and several top-secret products for the government.

AT&T For the Win

Despite the all the unlocking tools and hacks, 82% of those surveyed report their phone is not unlocked. This is good news for AT&T, who is raking in the profits - nearly $2 billion in increased revenues.

From the survey, here's how the $2 billion was calculated:

Most of my friends purchased iPhones. Despite poor phone quality, bad signals and late to get txt msg/emails through internet, most of them love their phone and enjoy their lives with that gadget.

It's pretty cool. It looks very fancy.

If somebody see that phone and try to test the iPhone, he/she really wants to buy that fantastic device.

However, for me, $199 or $299 (without tax) is too high to deal with because I got free company's blackberry phone.

I am still thinking I can have a chance to buy a new iPhone soon or later, though.

AT&T is so happy about their increased revenue such as 3 Million Dollars.

Also, their customers came from other competitors.

AT&T and Apple obviously spent the great time with iPhone last year.

But who knows?

New iPhones is coming? or another fantastic phone will be popular?

We will see.

AT&T turned in a decent fourth-quarter performance, despite being dogged by costs. Nonetheless, the weak economy will blunt the telecom firm's chances of any meaningful growth for the foreseeable future, and it still hasn't figured out how to counteract the loss in sales from those pesky landline defections.

All told, AT&T recorded a 22.6% earnings slide from the previous year's corresponding quarter, to $2.4 billion, or 41 cents per share, from $3.1 billion, or 51 cents per share. Excluding special items, earnings totaled 64 cents per share.

Between October and November 2008, AT&T (nyse: T - news - people ) beat expectations by adding 2.1 million wireless subscribers, largely because of its being the exclusive official carrier of the popular Apple (nasdaq: AAPL - news - people ) iPhone in the United States. So, yes, AT&T registered a strong quarter, but times are tough.

Though its wireless sales grew 13.2%, its landline sales 3.3%. Unlike Verizon (nyse: VZ - news - people ), AT&T still hasn't been able to quell sliding sales in the segment by selling broadband and TV services.

The San Antonio-based telecom operator expects sales to grow in the low single digit percentages. In a sign of the times, though, it also expects to cut capital spending by 10% to 15%, from the $19.7 billion it invested in 2008. That will hurt equipment vendors like Ciena (nasdaq: CIEN - news - people ) and Alcatel-Lucent (nyse: ALU - news - people ) since AT&T represents a third of spending on telecoms gear.

As in the case of Verizon, the upheaval in the financial markets is forcing AT&T to fill funding gaps. It announced Wednesday that its 2009 earnings will take a 19 cent per share hit owing to pension and retiree benefit costs. Excluding that cost, though, it expects margins to remain stable.

It's been a whirlwind year for Pantech Wireless. The Atlanta-based subsidiary of South Korean cellphone maker Pantech Group has released six phones in the last 12 months, including four in the last quarter. AT&T is promoting two of the handsets in TV spots as ideal holiday gifts. Patrick Beattie, Pantech Wireless' vice president of marketing and sales, says the company has never been busier.

While wireless giants like Nokia (nyse: NOK - news - people ) and Samsung slash their forecasts, Pantech Wireless, also known as PWI, is counting on its portfolio of slim, reasonably priced cellphones and its close ties with AT&T (nyse: T - news - people ) to help it grow in 2009.

Beattie says PWI's focus on stylish phones that mostly sell for $80 or less should boost its prospects in the current downturn. "We think our value is really resonating with customers in the U.S.," he adds.

Parent Pantech has a long and storied history in wireless. Following its founding in 1991, it says it created the world's first CDMA phone in 1994 and the first fingerprint-recognition phone in 2004. In its home market of South Korea, Pantech is the No. 3 cellphone maker, after Samsung and LG. In 2007, Pantech Group had revenues of $1.7 billion and sold 7.5 million Pantech-branded phones. It operates eight regional subsidiaries worldwide, in Beijing; Mumbai, India; Dubai, United Arab Emirates; St. Petersburg, Russia; and Sao Paulo, Brazil, among other cities.

PWI has sold products in the U.S. since the 1990s, but didn't target the market seriously until 2006, Beattie says.

Industry observers say PWI is taking the right steps, but remains a small player. Ramon Llamas, a senior research analyst at IDC, says Pantech ranks around No. 25 globally in handset sales, on par with Japan's Casio Hitachi. (IDC's figures, however, don't include the contract manufacturing work Pantech does for other brands.)

At the end of third-quarter 2008, PWI had just under 1% of the U.S. cellphone market, according to IDC. Beattie declined to give market share numbers, but said both PWI's and Pantech's sales figures had improved over the past two years.

To break out in the U.S., PWI must work closely with operators, says IDC's Llamas. "Distribution is the name of the game. It's great to be part of AT&T, but they should try to get in with more national carriers," he says. He is enthusiastic about PWI's Matrix and Slate phones, which have full Qwerty keyboards, noting that Americans are quickly snapping up messaging phones.

Samsung Omnia, Motorola Hint on tap

November 25 2008 - 1:56 pm ET | Phil Carson | RCR Wireless News

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The new Samsung Omnia touchscreen smartphone lands at Verizon Wireless for $250, after a $70 mail-in rebate, with a two-year service contract.

Carriers are putting the finishing touches on their portfolios this week as the traditionally hottest shopping day of the year draws close. That’s Black Friday, this Friday.

The new Samsung Omnia touchscreen smartphone will land at Verizon Wireless on Wednesday at $250, after a $70 mail-in rebate, with a two-year service contract.

The Omnia runs Windows Mobile 6.1, offers a virtual QWERTY keypad and customizable user interface. The device includes the Opera 9.5 mobile browser, a 5-megapixel camera, messaging options, Wi-Fi, Bluetooth and access to Verizon’s data services.

Verizon Wireless also has added the $350 HTC Touch Pro device to its arsenal (it launched earlier this month at Sprint Nextel Corp. for $300) at a price point at the very high-end of most carrier-based portfolios.

Not to be outdone, AT&T Mobility has discounted two messaging devices to spark consumer interest. The Samsung Propel and Pantech Matrix, typically $80 apiece, can both be had in a two-for-one deal.

Motorola Inc. announced the launch of its Hint device, a “social messaging slider” with a QWERTY keyboard, which will go through Alltel Communications L.L.C. for $100 after a mail-in rebate, starting Nov. 28.

Meanwhile, Verizon Wireless’ BlackBerry Storm is so popular at $200 — or supplies so limited — that the carrier’s Web site announced “limited availability” for the device, promising customers that new online orders will ship by Dec. 8. Stores on the East Coast are also sold out of the device, according to news reports.

AT&T Inc., the country's largest Internet service provider, is testing the idea of limiting the amount of data that subscribers can use each month.

AT&T will initially apply the limits in Reno, Nev., and see about extending the practice elsewhere.

Increasingly, Internet providers across the country are placing such limits on the amount of data users can upload and download each month, as a way to curb a small number of "bandwidth hogs" who use a lot of the network capacity. For instance, 5 percent of AT&T's subscribers take up 50 percent of the capacity, spokesman Michael Coe said Tuesday.

But the restrictions that Internet providers are setting are tentative. And the companies differ on what limits to set and whether to charge users for going beyond the caps.

Starting in November, AT&T will limit downloads to 20 gigabytes per month for users of their slowest DSL service, at 768 kilobits per second. The limit increases with the speed of the plan, up to 150 gigabytes per month at the 10 megabits-per-second level.

To exceed the limits, subscribers would need to download constantly at maximum speeds for more than 42 hours, depending on the tier. In practice, use of e-mail and the Web wouldn't take a subscriber anywhere near the limit, but streaming video services like the one Netflix Inc. offers could. For example, subscribers who get downloads of 3 megabits per second have a monthly cap of 60 gigabytes, which allows for the download of about 30 DVD-quality movies.

The limits will initially apply to new customers in the Reno area, AT&T said. Current users will be enrolled if they exceed 150 gigabytes in a month, regardless of their connection speed.

"This is a preliminary step to find the right model to address this trend," Coe said. The company may add another market to the test before the end of the year, he said.

Customers will be able to track their usage on an AT&T Web site. The company will also contact people who reach 80 percent of their limit. After a grace period to get subscribers acquainted with the system, those who exceed their allotment will pay $1 per gigabyte, Coe said.

Comcast Corp., the nation's second-largest Internet service provider and AT&T's competitor in Reno, last month officially began a nationwide traffic limit of 250 gigabytes per subscriber. Comcast doesn't charge people extra for going over the limit, but will cancel service after repeated warnings. Previously, it had a secret limit.

Two other ISPs, Time Warner Cable Inc. and FairPoint Communications Inc., are planning or testing traffic limits as low as 5 gigabytes per month, which is easily exceeded by watchers of DVD-quality online video.

Among the largest ISPs, Verizon Communications Inc. is a holdout, and has said it does not plan to limit downloads.

At first glance, third-quarter results from telecom giant AT&T (T) appear strong. The Dallas-based phone service provider posted net income of $3.23 billion, or 55¢ a share, a 5.5% increase from $3.06 billion, or 50¢ a share, a year earlier. Revenue gained 4%, to $31.3 billion, led by a notable 15.4% increase in wireless sales. To boot, the wireless business logged a whopping 2 million net new customers, giving AT&T nearly 75 million subscribers nationwide.

But troubling signals lie just beneath the surface. Customers are disconnecting phone lines at an alarming rate. Too few are signing on for broadband connections, and though the number of new wireless subscribers is impressive, AT&T's wireless margins are getting squeezed. All of this comes in the face of a weakening economic outlook that's forcing consumers to cut household budgets and banks to rein in lending. Worried shareholders traded AT&T stock down 7.6%, to about 23.78, after the results were released on Oct. 22. "The market is telling you there is a lot of risk out there for AT&T," says Timothy Horan, an analyst for Oppenheimer & Co.

And what's risky for AT&T may prove just as ominous for the rest of the telecom sector. Analysts expect Verizon Communications (VZ), Sprint (S), and other phone service providers to show similar signs of weakness when they report results in the coming days. In fact, AT&T is something of a proxy for the broader economy. As a huge provider of services to major businesses, AT&T's customer list contains businesses of every stripe. It is instructive that the carrier's enterprise services unit saw sales dip 1.4% from a year ago. "That is troubling as you head into the teeth of the recession," says Sanford C. Bernstein analyst Craig Moffett, who adds that the view of AT&T's financial future right now is "as clear as mud."

Existing strains in AT&T's local-phone business were accentuated in the third quarter. The number of consumer voice lines in service fell 10.5%, to 28.33 million, from a year ago. Things are not much better in the broadband arena. Last year at this time, AT&T added nearly 500,000 digital subscriber lines. This year, it added 148,000, a decline of more than 70%. "These are obviously challenging times," AT&T Chief Financial Officer Rick Lindner said on an Oct. 22 conference call with analysts.