PREVIEW-AT&T finds a double-edged sword in iPhone

*iPhone to help AT&T add mobile subscribers, hurt margins

*Verizon Wireless seen losing mobile market share

*Business revenue declines to worsen

*New prepaid competition seen as big industry risk

By Sinead Carew

NEW YORK, Oct 16 (Reuters) - For AT&T Inc (T.N), the iPhone is proving a big blessing -- and a bit of a curse.

Strong iPhone sales should boost AT&T's third-quarter subscriber numbers in next week's results report, providing growth for a company whose top executive recently warned that sales to the business market won't recover for another year.

Indeed, analysts say AT&T may report about 1.5 million new subscribers this quarter thanks to its deal with Apple Inc (AAPL.O), which gives it exclusive U.S. rights to sell the phone. In comparison, they say bigger rival Verizon Wireless, owned by Verizon Communications Inc (VZ.N) and Vodafone Group Plc (VOD.L), landed only about 1 million new customers in the quarter.

Already a blockbuster hit with consumers, sales of the iPhone recently got an added boost this summer from a price cut that took it down to $99.

Armed with the iPhone, AT&T holds a major advantage in its battle for new customers with Verizon.

"AT&T is increasing its market share due to the iPhone, causing Verizon to grow at a slower rate," said Soleil/Nelson Alpha Research analyst Michael Nelson.

But AT&T's deal for the iPhone isn't all bad news for Verizon, which also reports earnings next week. One area where Verizon comes out ahead is profit margins, which analysts say should look better than ever beside AT&T's margins.

Because each new customer addition comes with big costs, including hefty subsidies carriers pay for the price of most cellphones, the more customers an operator such as AT&T adds the more its margins will suffer.

R. W. Baird analysts Will Power cut his estimate for AT&T's third-quarter margin to 37.5 percent from 38.3 percent, citing a rise in costs from adding new customers. By contrast, he sees Verizon reporting a much higher margin of 46.2 percent.

But Power said he expects "competitive pressures to limit further upside" to Verizon margins, despite savings from its $28 billion acquisition of Alltel in January.

"In order for us to get more positive on Verizon, we would want to see improving share of wireless adds, stable wireless margins, and improving wireline margins," Piper Jaffray analyst Chris Larsen said in a research note.

Like AT&T, Verizon will suffer from accelerating revenue declines in the business segment, which has kept spending in check as the economy slowly recovers.

UBS analyst John Hodulik said he sees AT&T posting a third-quarter business revenue decline of 10 percent compared with an 8.2 percent drop in the second quarter. He expects Verizon to show a business revenue decline of 8.2 percent versus a 6.7 percent drop in the second quarter.

BUSINESS PRESSURE/PREPAID GROWTH

Analysts are hoping for improvements in quarterly subscriber trends at Sprint Nextel Corp (S.N) on growth in prepaid services, under which customers pay for calls in advance. Sprint's exclusive rights to sell the Pre phone from Palm Inc PALM.O should also help.

Sprint, which has been losing customers for years, is still expected to report a loss of about 870,000 monthly bill-paying subscribers, according to five analysts contacted by Reuters. In the second quarter, it lost 991,000 postpaid customers.

Sprint is expected to fare much better in prepaid subscribers. Its Boost unit -- which specializes in prepaid services -- has been gaining ground with an unlimited service plan it started selling early this year.

But Boost faces stiff competition in a mobile segment that has shown a surge of growth in the weak economy.

Prepaid competitors include Leap Wireless International Inc (LEAP.O), MetroPCS Communications Inc (PCS.N) and Tracfone, a unit of Mexico's America Movil SAB de CV (AMXL.MX) that is teaming with Wal-Mart Stores Inc (WMT.N) to sell unlimited plans.

Some analysts worry that if No. 4 U.S. mobile service T-Mobile USA, a unit of Deutsche Telekom AG (DTEGn.DE), expands its own low-cost unlimited plan nationwide in coming weeks as expected, it will pressure even the strongest operators.

Sprint could be particularly vulnerable, said UBS analyst John Hodulik, given it is "poorly positioned to counter a pricing move by its closest competitor in the value segment." (Reporting by Sinead Carew in New York and John Tilak in Bangalore, editing by Paul Thomasch and Gerald E. McCormick)