NEW YORK (AP) — AT&T Inc. on Tuesday posted the best profitability ever in its wireless arm, paradoxically because it sold fewer smartphones.

The largest telecommunications company in the U.S. said its subscribers are now holding on to their phones longer: The rate of upgrades to new phones was at a record low in the second quarter.

That's good news for the company because it to subsidizes each smartphone by hundreds of dollars to be able to sell it to customers for $99 or $199. IPhones, in particular, are expensive to sell, because Apple charges AT&T an average of around $650 for each one.

In March last year, AT&T started telling subscribers that they had to stay on contract for 20 months before they would be eligible for a new phone at the fully subsidized price. Before that, some high-paying customers had been eligible for upgrades after just 12 months.

"It appears our policy is working," John Stephens, AT&T's chief financial officer, told analysts on a conference call. He said another big contributor to the low upgrade rate was that many people upgraded late last year, when the latest iPhone debuted.

AT&T activated 5.1 million smartphones in its latest quarter, down from 5.5 million in the same period a year ago. That helped boost wireless operating income by 18 percent in the quarter, to $4.9 billion.

Analysts still expect AT&T's profits to take a dive this fall, when the new iPhone comes out. In what's become an annual ritual, buyers flood AT&T and Apple stores, and AT&T pays dearly for the privilege of having the nation's most popular network for iPhones.

The tighter upgrade policies don't seem to be scaring off AT&T subscribers. They were more loyal than ever in the quarter, helping AT&T outdo analyst expectations by adding a net 320,000 subscribers on contract-based plans in the quarter.

However, more than half of the new subscribers were tablet users, who pay less than smartphone users. Also, AT&T continues to lag Verizon Wireless, which already has more subscribers. Last week, Verizon reported adding 888,000 subscribers to its rolls in the quarter. Continued...