AT&T Inc survived the loss of its exclusive U.S. rights to sell the Apple Inc iPhone.

The No. 2 U.S. mobile service, which is planning to buy T-Mobile USA, managed to eke out a slight increase in subscribers in the first quarter, surprising Wall Street even as some analysts said the growth came at too high a cost.

Its addition of 62,000 net contract customers in the quarter was much weaker than its fourth quarter growth of 400,000 but better than the average expectation for a loss of 83,000 customers from seven analysts polled by Reuters.

The decline reflected the February launch of iPhone at Verizon Wireless, a venture of Verizon Communications and Vodafone Group Plc.

AT&T also attributed some of its defections to network technologies changes for some customers resulting from its acquisition of Alltel assets and Centennial.

But Wall Street analysts were impressed that it managed to keep customer defections lower than expected as many feared the Verizon iPhone would send hordes of customers fleeing AT&T, which has been criticized for poor network performance.

It doesn't look like (Verizon Wireless) decimated AT&T as many people thought they might, said Piper Jaffray analyst Christopher Larsen.

AT&T, which reduced the price of one iPhone model to $50 in the quarter, also noted that it still added 3.6 million new iPhones to its network in the quarter and that 23 percent of those customers switched from rival services.

But the iPhone promotion and other efforts to retain subscribers appeared to come at a heavy cost to profitability. AT&T's wireless service profit margin based on earnings before interest, tax, depreciation and amortization fell to 39 percent from 44.5 percent a year earlier.

It was also well below an estimate for 41.3 percent from Pacific Crest analyst Steve Clement.

This should put concerns on iPhone (subscribers) to rest for the time being but the margins are still a concern, Clement said.

AT&T earnings rose to $3.4 billion, or 57 cents a share, matching the average Wall Street estimate, according to Thomson Reuters I/B/E/S. A year earlier it posted a profit of $2.5 billion, or 41 cents per share.

Revenue rose 2.3 percent to $31.25 billion compared with analyst expectations for $31.26 billion, according to Thomson Reuters I/B/E/S. Its results came the day before the scheduled report of Verizon Communications.

AT&T is expected to surpass Verizon Wireless as the No. 1 U.S. mobile service if regulators approve its plan to buy No. 4 rival T-Mobile USA, a unit of Deutsche Telekom.

AT&T shares were down 10 cents, or 0.3 percent to $30.21 in early trading on the New York Stock Exchange.

(Reporting by Sinead Carew; editing by Derek Caney)

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