In the automobile sector, it was the Japanese giants that dramatically outperformed their US counterparts, particularly FORD

(NYSE: F). In the wireless industry, AT&T (NYSE: T), VERIZON COMMUNICATIONS (NYSE: VZ) and rural-based ALLTEL COMMUNICATIONS

(NYSE: AT) stole the show. In contrast, No. 3 company SPRINT NEXTEL

(NYSE: S) lagged well behind.

Sprint’s second quarter results were 38 percent below last year’s tally. Worse, management issued an equally gloomy forecast for the rest of the year, as its customers continue to defect to other providers as well as its own discount plans. Customer turnover (or

churn) was a lofty 2.1 percent, a full percentage point above Verizon’s 1.1 percent rate. Average revenue per customer plunged 6 percent and total revenue rose an anemic 4.7 percent.

Some of the company’s difficulties likely relate to continuing burdens taken on from the Nextel merger. In addition to operating glitches, it’s been forced to buy out several former Nextel affiliates at a cost of billions of dollars to settle legal wrangles. The company did have solid growth in data services, echoing a trend around the wireless industry and was able to raise rates for some services. But it looks like more difficult times lie ahead.

Sprint’s disappointing performance is particularly noteworthy in view of the fact that the company has long been a Wall Street favorite among US wireless providers. The company’s plan to co-market its service with big cable television companies has been hailed as a major potential breakthrough for both Sprint and the cable giants, who are increasingly locked in combat with major telecoms for all communications business.

At this point, it’s tough to say how the company’s ill fortune will or won’t impact this alliance. Major cable companies are reaping the benefits of bundling their traditional entertainment services with telephone and broadband internet in a powerful triple play. The company’s service bundles have largely halted the defection of customers to satellite television, and they’re proving popular in attracting customers from phone companies as well.

The Sprint/cable alliance was initially billed as a way for Big Cable to attack the wireless market without investing in networks itself. The plan is for Sprint to offer the wireless service, which would then be marketed under cable company names as a quadruple bundle--entertainment, Internet, phone and wireless.

“Quadruple bundle” is exactly what major phone companies have in mind as they enter cable television markets across the country. When completed, Verizon’s FIOS network will be far faster than any cable TV company’s coaxial/fiber optic-based network. Six states have already effectively opened their markets to competition by allowing Big Tel to apply for statewide licenses, and more are in the process. The latest to take action is New Jersey, where Verizon competes with CABLEVISION (NYSE: CVC), COMCAST (NSDQ: CMCSA) and TIME WARNER (NYSE: TWX).

Telecommunications law overhaul is being hotly debated in the US Senate, with Alaska Senator Ted Stevens as the driving force. The current bill, if passed, would allow Big Tel to enter the cable business on a national scale, further speeding its entry.

At this point, cable television companies appear to have the upper hand in the wireline market competition. Eventually, however, the ability to offer wireless service as well is likely to prove increasingly critical, as Big Tel’s reach in cable and broadband continue to grow. The key question will be whether or not partnering with a wounded Sprint will be the best way to go about it.

In the meantime, it looks like more good times ahead for the two biggest players in US wireless: AT&T and Verizon. The pair added 1.5 and 1.8 million customers, respectively, in the second quarter. At the same time, both increased average revenue per customer as they boosted data sales. Both also continue to ramp up their range of service offerings. That points the way to higher sales and profit margins going forward.

Unlike Sprint--which has now spun off all wireline operations as EMBARQ (NYSE: EQ)--AT&T and Verizon are still major players in wireline communications. Business communications at both has accelerated since the mergers of AT&T/SBC and Verizon/MCI, with companies gaining more business and boosting profit margins.

In retail wireline, Verizon’s long-term aim is to migrate customers to its FIOS network. But it’s already boosting margins and cash flows from wireline, posting rising revenue growth despite the loss of basic copper wire connections. The same is true of AT&T, which continues to add more broadband customers than it loses to local phone competition.

WRONG NUMBERS

The upshot: Second quarter results are more evidence that both AT&T and Verizon continue to succeed in their now decade-long transition from regional local phone monopolies to dynamic, all-communications companies. Along with cable giants Comcast and Time Warner, they’re increasing their dominance of the US communications industry. Most

important: The way is clear for them to keep getting stronger in the coming months and years.

Of course, you’re not likely to hear my opinion repeated much in the popular financial press or on television. For example, minutes after Verizon announced its second quarter numbers, one well-known critic pronounced the company as clearly in a prolonged slide, based on its loss of local phone lines over the past year. In his words, “things were going to get a lot worse before they get better.”

CNBC reporters focused on Verizon’s headline earnings number, which was 26.7 percent lower than last year’s. That figure, however, included one-time costs this year and a gain last year. Factoring these out, profits were ahead of both last year’s tally and Wall Street estimates.

The copper wireline business is steadily eroding for all those who provide it. Some younger customers particularly are cutting the cord and going only to wireless service. Others are using voice over internet protocol services, such as those offered by floundering VONAGE (NYSE: VG), cable companies and even Verizon itself.

The game in local wireline, however, has changed. Today, the major players are more concerned with maximizing revenue per customer, squeezing out operating costs and reducing debt and outstanding shares--with the goal of increasing cash returns. They’re still losing local lines and will continue to do so as new technology replaces them. But they’re more than making up for the losses by adding revenue from Internet and long distance services and cost cutting. And capital costs are very low, meaning virtually all the cash flows back to them.

As a result, the only really important number in the wireline business--cash flow--is growing for most players. Citizens Communications (NYSE: CZN), for example, boosted its free cash flow per share by 17 percent in the second quarter and now pays out just

51 percent of free cash in dividends. Other wireline companies like WINDSTREAM (NYSE: WIN)--created from the spinoff of Alltel’s wireline operations and subsequent merger with VALOR COMMUNICATIONS)--and OTELCO (AMEX: OTT) are pursuing the same strategy and reaping the same rewards. So is giant AT&T.

Verizon’s situation is slightly different because it’s the primary driver of the technology that will ultimately replace wireline networks entirely. The company’s fiber to the premises or FIOS network will be the fastest and highest capacity communications system anywhere, wholly replacing the old copper network that’s linked the country from coast-to-coast for a century.

As the builder, Verizon is also taking on the expense. This it can well afford to do given its thriving wireless business and the rising cash flow from its own basic copper wire network. But it has complicated the performance numbers and attracted a number of skeptics, who doubt the investment will ever pay off.

Again, the critics are focusing on the wrong numbers. Simply, America’s communications needs are changing. What matters to service providers is being in the forefront as those shifts happen.

A decade ago, another legion of industry critics professed doubt big regional Baby Bell phone companies would ever survive a competitive onslaught from long distance giants and the host of startups entering the business, all of which were supposedly smarter and more nimble. Few saw the potential of wireless phones, let alone believed the Bells could stay afloat in that business.

Today, wireless phones are the way the country communicates. And as the demise of Sprint shows, it’s the Bells that dominate.

Eventually, as has happened in Europe, Japan and Singapore, wireless will completely saturate the market and growth will slow. Data and new services sales will keep the gravy train running for a while after that, as it’s starting to do in those countries. But eventually, wireline communications--particularly broadband--will become increasingly important, and the companies who dominate it will be the big winners.

It’s far too early to say who those ultimate winners will be. Cable companies are enjoying fatter profits and cash flows than ever before. And the US government may at some point re-regulate the industry, as the European Union and New Zealand may be starting to do. But building now is the best way to assure a company a place at the table of the future of telecommunications.

And no telecom is moving as effectively to do that as Verizon.