MetroPCS expands both 4G and 2G coverage

MetroPCS (NYSE:PCS) today expanded not just its new 4G network, but its entire 2G coverage footprint. It announced Metro USA, which extends unlimited voice, SMS and web access to a roaming footprint covering 90% of the U.S. population. Meanwhile, Metro officially turned on its long-term evolution (LTE) network in Los Angeles and Philadelphia, beating many of its much larger 4G competitors Clearwire(NYSE:CLWR), Sprint (NYSE:S) and Verizon Wireless (NYSE:VZ, NYSE:VOD) to LA.

MetroPCS is now the only 4G service provider in two major markets, LA and Detroit, though the service it offers differs considerably from the WiMax access offered by Sprint and Clearwire and the LTE plans VZW will offer later this year. Rather than focus on 4G’s enormous broadband potential, MetroPCS is building a lower-capacity LTE network as a stand-in for 3G, offering feature phone and smartphone services that closely mirror the tier 1 operator's 3G services today.

MetroPCS currently offers an advanced feature phone, the Samsung Craft, which taps into the Qualcomm (NASDAQ:QCOM) BREW services that Metro’s other feature phones use as well as a suite of more advanced video services supplied by RealNetworks (NASDAQ:RNWK). But Clearwire plans to take full advantage of 4G’s capabilities with a line of new Google (NASDAQ:GOOG) Android smartphones. In Q4, Metro will launch multiple Android devices, but its first LTE smartphone won’t be available until next year, CEO Roger Linquist said at Metro’s Q3 earnings call today. As 2011 progresses, though, Metro will ramp up its smartphone efforts and plans to have “half a dozen” LTE devices--all within the $200 to $500 price range--in its portfolio by year end.

Unlike its tier I competitors, MetroPCS does not subsidize its handsets, which would leave its typically budget-minded customers on the hook for a hefty price tag if they want to buy one of Metro’s smartphones. Metro’s low-cost voice and data plans—some as cheap as $55 a month—though would offset much of those costs. Linquist also pointed out that device cost was not a significant barrier for Metro’s customers as they took up high-end feature phones in the last two years. As smartphone costs become less prohibitive, it will be only natural for smartphones to scale down to the prepaid market, he said.

“Our view is 2009, late 2010 was really the period of Qwerty in the no contract market,” Linquist said. “We think that’s moving very strongly to the smartphone and touch-screen going forward in 2011 and beyond. We want to be well positioned with a variety of products based on handset prices and comprehensiveness of service practices that can deal with this. And we do think as we move into the more extensive service packages, there is an opportunity for some lift in [average revenue per subscriber].”

With the launch of its nationwide Metro USA plans, though, MetroPCS is expanding beyond its usual local focus. In one sense, it's taking a page from the book of fellow tier II prepaid provider Leap Wireless by offering a national service plan, but unlike Leap, MetroPCS doesn’t have plans—yet—to become a national service provider. Leap is becoming a virtual operator on Sprint’s network, allowing it to offer services directly in the numerous markets it doesn’t have networks or spectrum.

While Leap is trying to expand into more markets, MetroPCS seems more concerned about building share in the large metro markets where it operates. Rather than make MetroPCS attractive to customers outside of its territory, Metro USA is designed to make the service more attractive to mid-tier and budget customers inside of its footprint, said Tom Keys, MetroPCS chief operating officer. By MetroPC estimates it has an 8.1% penetration rate in the markets where it has service, even after factoring in the 4 million pops of coverage Metro added this year. Considering that Metro primarily serves the country’s largest cities, such as New York, LA and San Francisco, it usually faces half-a-dozen or more competitors in its markets. Luring contract subscribers over to the prepaid has been a huge driver in Metro’s recent growth, accounting for one-third of its gross additions, Keys said. A nationwide unrestricted roaming will be a useful tool in increasing the flow, he said.

“This increased coverage provides subscribers with incredible value and brings parity when compared to the larger national carriers, as we continue to provide a postpaid experience in a pay-in-advance no-contract model,” Keys said.

The difference between Leap and Metro’s strategy may have been a key factor in their wildly different earnings performance this week. Leap on Wednesday reported a net loss of 200,000 subscribers, while MetroPCS reported a net gain of 223,000 customers. But according to Bernstein Research senior analyst Craig Moffett the real divergence between MetroPCS and Leap Wireless can be seen in their cost metrics, critical to prepaid operators whose business models are built on cost structure. Leap’s cash cost per user and cost per gross addition numbers rose considerably, while Metro’s increased only slightly and well within analyst estimates, Moffett said.

“One can't help but marvel over how two companies with such remarkably similar strategies--dense urban markets, ethnic and lower income consumers, and a relentless cost focus--could yield such radically different results,” Moffett wrote in a research note. “While [Metro]PCS remains focused on cost management (the critical issue for maintaining competitive advantage in their low cost/low priced model), Leap Wireless is off chasing butterflies in a national expansion, with roaming today and a shadow MVNO on Sprint's network tomorrow. The difference is inexplicable.”