Leap, MetroPCS encroach on national carriers

United States-based regional carriers MetroPCS and Leap Wireless both reported their fourth-quarter earnings last week, and both saw a substantial spike in their subscribership. While landline cord-cutters, not yet tier-one churn, was to thank for their growth, the regional carriers are looking more national every quarter and could soon pose a formidable threat to the large operators – either individually or potentially as a merged company.

Metro and Leap share a common model of going for densely populated areas to get more bang for the buck, said Bill Ho, wireless analyst at Current Analysis. Both companies offer low-cost, contract-free services, operate on CDMA networks, use PCS and Advanced Wireless Services (AWS) spectrum and operate in different regions of the country – Metro captures the big markets in the Northeast, and Leap now covers Chicago, the third largest US market. For these reasons, a merger between the two is entirely possible, if not inevitable, Ho said. Leap and Metro already began to play nicely together in September by forming a roaming agreement, swapping spectrum in overlapping markets and dropping a two-year-old legal dispute between them.

“Roaming agreements only go so far,” Ho said. “It’s the whole synergistic capabilities of one organization. One organization with one marketing message is more effective. That is the end game to give national carriers a run for their money and go head-to-head with them. In terms of coverage, they don’t overlap a lot. From the perspective of spectrum and assets, they don’t overlap; they complement. It’s almost eerie or well-conceived knowing that this is kind of the end game.”

A merger isn’t openly discussed today, although it has been attempted in the past, but the cards aren’t off the table. For now, both companies have seen impressive growth on their own. Metro finished 2008 with approximately 5.4 million subscribers. Metro’s 520,000 net subscriber adds in the fourth quarter was the best quarterly growth in the company’s history. Roger Linquist, chairman, president and chief executive officer, said that the carrier has reported total net sub additions of 35% or higher in each of the last six years. Last year alone, subs grew 83% in expansion markets and 12% in Metro’s core markets due largely to increased consumer awareness of unlimited calling and landline cord cutting.

Metro now provides unlimited wireless service in 9 of the top 12 markets in the US and services starting at $45 per month in 92 of the top 100 markets. It rounded out its Northeast push by expanding into two of the largest US markets New York and Boston with CDMA networks built by Alcatel-Lucent in early February, following a launch in Philadelphia last summer. The networks all use the AWS spectrum Metro won at auction in 2006, as do Las Vegas and Shreveport, La. The carrier also provides roaming coverage in more than 300 cities in the US. The carrier isn’t done growing, either, as it has more AWS spectrum from NextWave with which to expand.

AWS spectrum owner Leap also reported higher net customer additions and a lower churn rate in the fourth quarter, despite posting a quarterly loss of $54.8 million. Leap’s customer churn was 3.8%, down from 4.2% a year earlier. For 2009, the carrier is forecasting net customer additions of greater than 1.5 million. Leap added 626,000 subscribers, 385,000 in existing markets and 241,000 in expansion markets. Its total sub base was 3.84 million by the end of the quarter.

Following its successful launch in Milwaukee last fall, Leap recently entered Chicago with a 3G network built by Huawei. Leap CEO Doug Hutcheson said the company more than 60% to 65% of its customers are wireless-only, and the number is growing. Further, 90% of Leap’s customers already use the service as their primary phone line, so – like Metro – Leap is quite a bit down the path of people no longer having a landline, he said.

To date, it’s still the tier-two players feeling the squeeze from Metro and Leap. US Cellular, which also reported earnings last week, has seen increased competition from both carriers as well as Boost Mobile, Sprint’s prepaid arm that launched an aggressive $50 unlimited plan with no hidden fees along with a revamped marketing campaign. As a regional carrier, US Cellular faces a tough fight, Ho said, but Chief Operating Officer Jay Ellison insisted on the earnings call that despite entering many of its core markets, Leap’s competitive threat has been negligible.

US Cellular is a 95% postpaid business, so the carrier is only fighting off the regional operators in its small prepaid business. Out of about 20,000 new customers added in the fourth quarter, 41,000 were postpaid. The carrier is ramping up its prepaid business, however, to be ready for anticipated growth in this arena, Ellison said. Likewise, with its $50 unlimited plan, Boost made it clear it was going after Metro and Leap, emphasizing its national coverage and transparency in pricing. T-Mobile, too, responded with a $50 unlimited plan, although it only applies to current customers of more than 22 months. Metro and Leap’s plans start at a baseline of $35 per month for unlimited domestic long-distance calls and $45 per month for roaming outside of their home networks. They do include the standard charges and overage fees but still fall significantly below most tier-one carriers’ cheapest plans.

“The larger carriers have an unlimited plan that is twice the price, according to their marketing, which helps the cause to get into prepaid and use [the larger carriers] as a stick to show their value,” Ho said. “They don’t really say the larger carriers have a nationwide footprint whereas [regional carriers] do not. Part of it is a marketing game where people who may not travel outside their home calling area would eat this all up.”