Prepaid competition takes its toll

This week’s bevy of second-quarter wireless earnings had one thing in common: all the carriers felt the effects of prepaid competition. Fourth-largest wireless operator T-Mobile USA (NYSE:DT), prepaid CDMA providers MetroPCS (NYSE:PCS) and Leap Wireless (NASDAQ:LEAP) and regional operator US Cellular (NYSE: TDS) all reported numbers showing that while lowered price points and a focus on prepaid might be good for consumers, it hasn’t been good to their business.

Competition in the prepaid space has been fast and furious, with prices quickly falling 60% in the past six months. Both Leap and Metro now offer $40 unlimited voice and data plans, while their competitors – Boost Mobile, T-Mobile and Virgin Mobile all offer $50 unlimited plans. Verizon’s MVNO Tracfone also began offering a $45 unlimited Straight Talk plan, as well as an unlimited broadband plan. Boost Mobile, as well as its parent company Sprint, saw strong prepaid additions in Q2, but the additions came at the expense of their smaller rivals.

MetroPCS added only 206,000 customers in Q2 compared to the 684,000 it added in first quarter. The slowdown came even as it was actively serving New York City and Boston for the first full quarter, markets which effectively grew its footprint by 53%, according to Bernstein Research. Growth in Metro’s core markets outside of the Northeast saw their subscribers fall to 12,000, a year-on-year decline of 93%. Chief Financial Officer Braxton Carter described the results and Metro’s competitive response as the normal course of business.

“We haven’t changed our price; the plan range is still $30 to $50,” Carter said on the call. “We feel there is a tremendous value in the $45 to $50 plan, particularly for international long-distance on an unlimited basis. So we feel that it is absolutely imperative that companies like ourselves focus on our cost structure because the superior cost structure does have a huge advantage as we add more value to these price plans over time.”

Chief Operating Officer Tom Keys added that Metro’s Wal-Mart sales have not seen any changes following the introduction of Tracfone’s $45 plan. Metro also raised the prices of its low-end handsets – first from $49 to $59 then to $69 a month later, and saw its churn increase as customers left following the end of aggressive promotions that bundled phones with a month of free service.
Leap Wireless had an equally challenging second quarter. The carrier added 203,000 customers in Q2, an increase of 19% year-on-year, but fewer than half as many of the 493,000 customers it added in Q1. 184,000 of those customers came from Leap’s expansion markets, and 25,000 customers were lost from its existing markets at a churn rate of 4.4%.

“The competitive landscape changed significantly and, as a result, other carriers responded with larger than typical channel incentives, especially at the end of the quarter,” Chief Operating Officer Al Moschner said about the less-than stellar quarter. Moschner also said that Leap is accustomed to competing with lookalike competitors and will continue to improve its service plans to remain competitive.

US Cellular is not focused on the prepaid market, but it often finds itself competing with both the prepaid providers and the Tier I megacarriers– and this quarter, competition hit hard. The carrier gained 15% in profits, but actually posted a subscriber loss of 88,000. CEO John Rooney attributed the loss to the competitive environment, as well as exclusive handset launches, including the iPhone. US Cellular is amongst the smaller carriers petitioning the FCC to outlaw exclusive handset deals that they say limits competition and innovation in the wireless industry.

T-Mobile also reported Q2 subscriber numbers Thursday. The operator added 325,000 new, mostly prepaid subscribers, down from 415,000 in Q2 of last year and down from 415,000 sequentially. Although only 17% of its customer additions were postpaid, of T-Mobile’s 33.5 million subscribers, contract customers still represent 81%. The company is counting on the strength of its Android devices – including the newly launched myTouch 3G, to help attract more postpaid subs.