MOBILE CARRIERS SERVE UP ALL-YOU-CAN-TALK PLANS

Unlimited calling plans popular, but economic viability in doubt

All-you-can-talk local-area pricing plans are becoming the service offering of choice for wireless carriers looking to penetrate underserved markets and stave off the competitive threat of Leap Wireless. But industry watchers question whether this can be a sustainable model for everyone.

Leap changed the paradigm of wireless service offerings in 1999, when it began launching Cricket-branded CDMA service in select mid-sized markets with a no-frills, flat-rate pricing plan for an unlimited amount of airtime within a local calling area. Today, Leap operates in 40 markets, supporting more than 1 million customers.

Leap reports that most of its customers are younger than other wireless customers, are new to wireless or have not owned wireless phones for more than a year and use their Cricket phones as their primary phone. These are all customer attributes other carriers want as they seek to target new market segments to increase their service penetration.

Last week, Qwest Wireless ventured into the all-you-can-talk pricing world by offering unlimited calling plans for $40 per month in southern Minnesota and Nebraska. “This customer segment is emerging now,” said Tania Bahr-Torline, marketing director for Qwest. “We expect big growth.”

But whether traditional carriers can sustain these types of rate plans is questionable.

ALL-YOU-CAN-EAT PLANS
Carrier	Markets launched	Date first market launched
Alltel	11 markets	December 2000
Leap Wireless	40 markets	March 1999
MetroPCS	Miami, Atlanta, Sacramento	January 2002
Northcoast PCS	Cleveland	April 2001
Qwest Wireless	Minneapolis/St. Paul, Omaha/Lincoln, Neb.	March 2002
U.S. Cellular	Knoxville, Tenn.	August 2000
Source: Companies

Leap Wireless and other players primarily targeting this space say a sharp focus on costs and network optimization is key to profiting from of all-you-can-talk plans. Traditional carriers risk cannibalizing their existing customer base, analysts say. Leap's customers use approximately 1100 minutes each per month. The average wireless user consumes about 400 to 500 minutes per month.

“Cost is absolutely the key. In order to offer what we are offering, other carriers are going to have to acknowledge that ARPUs will drop dramatically,” said Dennis Spickler, vice president and chief financial officer for CDMA operator MetroPCS, a C Block PCS operator whose sole business plan is offering unlimited calling plans in metropolitan markets such as Miami.

Alltel, which has offered an unlimited calling plan called Boomerang in 11 markets for more than a year, believes all-you-can-talk plans don't work as a stand-alone service because there isn't a graduation from one customer segment to the next to allow carriers to scale their networks. Leap and MetroPCS believe it is a viable service if one carefully manages costs.

“We'll see over time how sticky these customers are,” said Philip Junker, executive vice president of marketing for Alltel.

In markets where it has been operating for a year or more, Leap's churn has averaged about 3.8% per month — significantly higher than the industry's average monthly churn of about 2.5% to 3%.

Still, Qwest believes its unlimited plans are a better alternative to prepaid offerings, which have become cumbersome for most carriers because customers don't regularly replenish their prepaid airtime and often churn from the network. Flat-rate pricing is more predictable and attractive to customers, Bahr-Torline said.

Alltel has expanded its Boomerang service into a prepaid offering for the rest of its wireless markets. “We learned so much about the youth segment and marketing that we converted that into a broader prepaid product offering,” said Junker.

Time will also tell whether a market can support more than one wireless player offering unlimited airtime. The Omaha and Lincoln, Neb., market now has Leap, Alltel and Qwest competing with all-you-can-eat pricing. Companies such as MetroPCS and Northcoast PCS, another PCS operator offering only unlimited calling plans, have purposely avoided markets where Leap has launched service.

“There is a fair amount of first-mover advantage,” Spickler said.

Alltel began offering its Boomerang service before Leap launched its plans in some of the same markets, but Leap Chairman and CEO Harvey White said the company hasn't seen much of an impact. Alltel's Junker said the company is holding its own against Leap.

“We track each market,” White said. “Whether competitors are in or out, it doesn't seem to have affected us.”

Cellular South recently stopped selling unlimited calling plans in Memphis, where it competes head-to-head with Leap.

“I don't think anyone can be competitive against Leap because it's not just the product that Leap has,” said Todd Rethemeier, senior wireless analyst for Bear Stearns & Co. “It's the marketing skill that Leap has. When they go into a new market, it's amazing the buzz they create.”