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Verizon to dominate Q2 wireless growth

Employee holds out an iPhone for a customer at a Verizon store in Boston
Employee holds out an iPhone for a customer at a Verizon store in Boston

By Sinead Carew

NEW YORK (Reuters) - Verizon Wireless is expected to far outstrip its biggest rivals AT&T Inc and Sprint Nextel in subscriber growth for its first full quarter selling the Apple Inc iPhone.

But the top U.S. wireless service may not have long to celebrate, as it grapples with profit margin pressure and the possibility of new iPhone sellers.

Verizon Wireless is expected to add about 930,000 net subscribers in its second-quarter results to be issued July 22, according to the average of estimates from seven analysts contacted by Reuters.

AT&T, which lost exclusive rights to the iPhone when Verizon started selling the device in February, is expected to scrape together just 91,000 net new subscribers this quarter. Sprint is expected to lose about 15,000 contract customers, according to the same analysts.

AT&T plans to post its results July 21, a week before Sprint's July 28 report.

On top of growth from the iPhone, analysts said Verizon Wireless also appears to be drumming up strong sales of smartphones for a high-speed network it is building based on Long Term Evolution (LTE) technology.

"It's due to solid iPhone sales as well as LTE handsets selling well," Mizuho analyst Michael Nelson said.

Apart from coping with the loss of iPhone exclusivity, which had boosted AT&T's growth for more than three years, the No. 2 U.S. mobile provider also lost about 100,000 customers in the second quarter according to Nelson. Those were customers that came from an acquisition of Alltel assets, who would have had to switch phones to stick with AT&T.

NEW LEADER IN THE MAKING

AT&T is seeking regulatory approval to buy T-Mobile USA, the No. 4 U.S. mobile provider owned by Deutsche Telekom. If the deal is approved, the $39 billion transaction would create a new market leader in 2012, surpassing Verizon Wireless in customer numbers.

Verizon Wireless, jointly held by Verizon Communications and Vodafone Group, has long led the U.S. market in wireless service profit margins.

But those margins may have come under pressure because it pays a higher subsidy to sell iPhones than other devices. Those subsidies allow operators like Verizon and AT&T to discount phones in order to lure consumers into two-year contracts.

As a result, analysts see Verizon's wireless service profit margin falling to as low as 44.7 percent in the second quarter, from 47.5 percent a year earlier. AT&T's margin is expected to fall to about 40 percent from 43.1 percent a year.

Some analysts also speculate that Apple may allow Sprint Nextel, the No. 3 U.S. mobile service, and T-Mobile USA to sell the next version of iPhone, which is expected to go on sale in September.

That would create tougher competition for both Verizon and AT&T. If Sprint continues to offer wireless service plans that allow unlimited mobile web-surfing -- a key offering for iPhone customers -- this could make it more attractive to heavy data users than today's two iPhone providers.

This puts pressure on Verizon Wireless to win as many new iPhone customers as it can and as quickly as possible, according to Piper Jaffray analyst Christopher Larsen, who expects wider U.S. iPhone distribution to come soon.

"In general you'll see share shift to Sprint and T-Mobile from Verizon and AT&T" if they get the iPhone Larsen said.

(Reporting by Sinead Carew; editing by Derek Caney)

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