• by Mark Walsh  @markfwal, October 22, 2008

T-Mobile's G1 phone made its long-awaited debut in stores Wednesday, but the latest iPhone continued to crowd the spotlight. The popular Apple device helped drive solid third-quarter results for AT&T, accounting for 2.4 million phone activations and nearly 1 million new subscribers.

The largest U.S. phone company overall reported a 5.5% increase in profits to $3.2 billion on sales of $31.2 billion, up 4% from the year-earlier quarter. Profits for the wireless division, which makes up 40% of AT&T revenue, increased 15% on sales--up 21% to $12.6 billion from a year ago.

Led by the iPhone 3G, AT&T added 1.7 million net contract subscribers, the largest one-quarter gain in the company's history. With 22% of its wireless customers now using smartphones, wireless data revenue jumped 50% from a year ago to $2.7 billion.

"Our iPhone 3G initiative is doing everything we hoped for and more," said Ralph de la Vega, president and CEO, AT&T mobility and consumer markets, during a conference call Wednesday.

On Tuesday, Apple reported selling 6.9 million iPhone 3Gs since its July release, surpassing the number of original iPhones sold in the last year.

For AT&T, the iPhone's success does not come without cost, however. Heavy data usage generated by the device added $900 million in wireless operating expenses, reducing earnings by the same amount, or 10 cents a share.

Despite the higher network costs associated with the iPhone, de la Vega said the long-term benefits of attracting higher-value customers with the device outweighed the downside of increased expenses. "It's a great opportunity and the best growth area in telecom, and that's wireless data," he said.

The wired side is another story. AT&T lost 990,000 primary phone lines during the quarter, with revenue for the wired business falling 2.2% to $17.6 billion for the quarter. Earlier this year, the company cut more than 4,000 workers--most in its residential phone business, as customers increasingly switch over to cable and wireless phone service.

A recent Nielsen Mobile study estimated that one in five U.S. households could be wireless-only by year's end. Already, 20 million households--or 17%--are abandoning wireline phones in favor of mobile ones, up from 8.5% in 2005.