updated 7/22/2004 4:57:18 PM ET 2004-07-22T20:57:18

AT&T Wireless Services Inc.’s earnings declined 73 percent in the second quarter from a year ago as industry price wars drove down the average revenue from each customer while the company’s expenses increased.

The Redmond, Wash.-based wireless telephone giant reported Wednesday it earned $61 million, or 2 cents a share, in the April-June period, down from $228 million, or 8 cents a share, a year ago. Analysts surveyed by Thomson First Call had expected the company to lose 1 cent a share.

Revenue edged up to $4.22 billion for the quarter from $4.16 billion for the same period last year.

But average revenue per user declined to $58.80, down from $60.60 a year ago. Expenses increased, with the company’s cost of equipment sales rising as customer rebates for phones become more generous. Capital expenses also rose to $897 million in the latest quarter from $373 million a year ago.

The customer churn rate, or the percent of customers who leave for competitors, also increased, to 3.4 percent a month in the latest quarter from 2.2 percent in the year ago quarter.

In contrast, Sprint Corp. said Wednesday its wireless division has a monthly churn rate of 2.6 percent and Nextel Communications Inc. reported a monthly churn rate of 1.6 percent.

“Every year AT&T Wireless loses four out of 10 customers,” said Albert Lin, a wireless analyst at American Technology Research. “That’s why investors thought the company needed to be sold. They weren’t able to run this business themselves.”

Cingular Wireless LLC has agreed to buy AT&T Wireless for $41 billion in February, in a deal subject to regulatory approval. Both companies have said they hope the deal will close by the end of the year.

Part of AT&T Wireless’ problem is that it uses too many different kinds of technology, confusing customers and increasing operating expenses, Lin said. “That’s why AT&T Wireless has the lowest margins of all the carriers in the industry.”

The company earned $3 million, about break-even in per-share terms, in the six months ended June 30, compared with earnings of $370 million, or 13 cents a share, a year ago. Its revenues rose to $8.29 billion from $8.11 billion a year ago.

“Our competitors are feasting on the misimpression, which they may sometimes be helping along, that AT&T Wireless is going out of business when it merges with Cingular Wireless in the coming months,” said John Zeglis, the company’s chairman and CEO.

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