Oct. 22 (Bloomberg) -- AT&T Inc., the largest U.S. phone company, posted a third-quarter profit that trailed analysts' projections after subsidizing the majority of the cost of Apple Inc.'s iPhone 3G to attract subscribers.

The stock fell 7.6 percent in New York trading after AT&T said earnings amounted to 67 cents a share, including 10 cents in iPhone expenses. That figure, which excludes acquisition costs, missed the 71-cent average of estimates compiled by Bloomberg. AT&T activated about 2.4 million iPhones.

Customers are snapping up iPhones faster than expected, forcing AT&T to spend more on subsidies, Chief Financial Officer Rick Lindner said. AT&T probably pays $450 a phone, compared with its $199 price tag, according to Stifel Nicolaus & Co. analyst Chris King. Investors may be concerned about those profit margins as consumers tighten budgets amid the economic slowdown, he said.

``It's not an environment where people are going to appreciate longer-term investment strategy,'' said Baltimore- based King, who advises investors to buy AT&T shares and doesn't own any. Profit estimate ``numbers are coming down. Our numbers are going to be coming down somewhat dramatically.''

AT&T fell $1.95 to $23.78 at 4 p.m. in New York Stock Exchange composite trading. The shares have declined 43 percent this year.

Net income increased 5.5 percent to $3.2 billion, or 55 cents a share, from $3.06 billion, or 50 cents, a year ago, Dallas-based AT&T said in a statement today. Sales rose 4 percent to $31.3 billion, meeting the average of estimates compiled by Bloomberg.

IPhone Charges

The $199 iPhone 3G is selling more than twice as fast as the original model, with about 40 percent of activations going to new customers, AT&T said. Costs to subsidize the iPhone may outstrip investors' expectations this quarter, Lindner said today on a conference call. AT&T said in July the phone would cost the company 10 cents to 12 cents a share in the second half of 2008.

Chief Executive Officer Randall Stephenson has relied on wireless service to make up for declines in home-phone customers and corporate budgets. The iPhone costs customers an average of 1.6 times more a month than AT&T's overall wireless bills. AT&T sells the device at a loss and tries to recoup the money through a mandatory two-year service contract.

Home-phone customers abandoned 990,000 primary lines last quarter, dragging sales in the wireline business down 2.2 percent to $17.6 billion.

Challenging Times

``These are obviously challenging times, and they're challenging for companies across all industries,'' Lindner said. ``It's also important that we take advantage of clear growth opportunities when they present themselves, and that we position the company for the future, and one of these for us, one of our clear opportunities, is our agreement with Apple.''

AT&T added 2 million net wireless subscribers, an increase of 2.7 percent. Wireless revenue surged 15 percent to $12.6 billion as consumers flocked to stores for the latest version of the iPhone. Sales of services such as Internet access and text messaging climbed 51 percent.

Apple said yesterday that it sold 6.89 million iPhones in the quarter, reaching CEO Steve Jobs's goal of selling 10 million handsets three months ahead of schedule. Gene Munster, an analyst at Piper Jaffray & Co., had estimated sales of 5 million in the quarter.

With the economy slowing, concern is building about holiday sales industrywide. Spending in November and December will grow at the slowest pace since 2002 as credit shortages discourage customers from shopping, the International Council of Shopping Centers said. U.S. retail sales have dropped for the past three months, the longest slump in nearly two decades.

The slowdown also has pinched corporate budgets. Business sales, which accounted for more than a third of revenue last quarter, were little changed at $11.5 billion. Sales to large businesses fell 1.4 percent to $4.7 billion, AT&T said.

To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net

Last Updated: October 22, 2008 16:08 EDT