• by Thom Forbes  @tforbes, April 25, 2014

Although Verizon Wireless’ customer base increased by more than a half-million customers last quarter, the growth came through new tablet connections, indicating that aggressive marketing campaigns by its rivals are cutting into its mobile phone business. Verizon Wireless added 634,000 tablet users but lost about 138,000 net postpaid phone customers.

“To see Verizon actually losing phone customers is a shocking turnaround,” MoffettNathanson senior research analyst Craig Moffett tells the Wall Street Journal’s Ryan Knutson and Ben Fox Rubin. “Verizon has been the growth leader of the industry every quarter since they got the iPhone.”

In February, Verizon concluded a deal to buy out the 45% stake that the U.K.’s Vodaphone held in Verizon Wireless since its founding in 2000.

“I think AT&T right now is winning when it comes to getting the new subscribers,” S&P Capital IQ senior industry analyst Angelo Zino tellsForbes’ Maggie McGrath. “It appears that Verizon’s goal here is to make sure they can continue to grow profitability and keep margins afloat, and I think because of that they haven’t been as aggressive as AT&T on some of the value customers,” he said.

“To date, Verizon subscriber trends have held up well despite the onslaught from T-Mobile ... however, this quarter, AT&T responded on pricing and Verizon's trends suffered as a result,” New Street Research analyst Jonathan Chaplin tells CNET’s Roger Cheng.

Verizon CFO Fran Shammo “acknowledged the loss of customers, largely on the 3G and basic phone,” on a conference call transcribed by Seeking Alpha yesterday, “but said that it took steps to address the issues with promotions later in the quarter, and saw improved results in March,” Cheng reports.

“Verizon, like AT&T, made a few moves to target more budget-conscious customers, as well as giving price breaks, global text messages, and additional data capacity under a new program called ‘More Everything,’” he points out.

Several observers suggested that AT&T was still the bigger threat to Verizon Wireless than T-Mobile despite CEO John Legere’s aggressive tactics to snare current customers (which have been targeted more directly at AT&T).

“AT&T has reacted much more directly to the T-Mobile threat, dropping its own pricing and — at least for a time — countering T-Mobile’s offer to pay customers to join its network,” writes GigaOm’s Kevin Fitchard. “AT&T added 1 million net new subscribers in Q1. Smartphones only accounted for 311,000 of those new connections, but that’s still a lot more than Verizon.”

Overall, the results were positive at Verizon and it headlined its “fifth consecutive quarter of double-digit percentage growth in operating income and earnings per share” in its release. But “those results reflect an after-tax gain of $1.9 billion related to its just-completed deal” with Vodaphone, points out Re/Code’s Dawn Chmielewski. 

Excluding that one-time item, its first-quarter profit of 84 cents a share fell short of the analysts’ consensus estimate of 86 cents, Chmielewski reports, “and those improved results incorporate the benefits of more than a month of total control of Verizon Wireless.” Its stock was down 1.15 (2.42%) to 46.28 on the day as a result.

“FiOS was a particularly strong segment for Verizon, representing 74% of total consumer revenue and total FiOS revenue growing 15.5% year-over-year to $3.04 billion,” reports Forbes’ McGrath.  “The company said it added 98,000 new FiOS internet connections and 57,000 new FiOS video subscribers.”

Meanwhile, Los Angeles Times’ consumer columnist David Lazarus charges Verizon Wireless with “[selling] out customers with a creepy new tactic” this morning. “Verizon will monitor not just your wireless activities but also what you do on your wired or wi-fi-connected laptop or desktop computer — even if your computer doesn't have a Verizon connection,” he writes. “The company will then share that additional data with marketers.”

In essence, when Verizon Wireless customers register at the “My Verizon,” website, a cookie is installed that tracks where customers go after they leave the site and “anonymously” enables marketers to deliver more “relevant” advertising to their mobile devices, as a spokeswomen tells Lazarus.

Customers can opt out of the Relevant Mobile Advertising program although admittedly “no explicit notice is given when the cookie is installed.”

Lazarus acknowledges that all this is exactly what “most other big Internet companies do” to make money. “But here's the thing: Google and Yahoo offer lots of cool free services, such as Gmail and Yahoo Finance. Their aggressive data collection is how they help subsidize these offerings,” he writes. “In Verizon Wireless' case, customers pay them upfront for the services they receive.”

Hey, but what could be more valuable than more relevant advertising, right?