Even the Best Prepaid Plans Go Astray

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First quarters are supposed to be the best time of year for this country's prepaid mobile operators. But it didn't turn out that way for the two largest pay-as-you-go carriers.

MetroPCS (NYSE: PCS  ) , coming off a strong fourth quarter, saw its earnings per share drop 76% in the next three months. Why? Because it focused on moving its existing and new customers onto its 4G LTE network by subsidizing the cost of the pricier LTE smartphones. As MetroPCS Chairman and CEO Roger Linquist said in the company's press release: "[The] higher promotional handset cost during the quarter resulted in higher costs. ... Adjusted EBITDA margins were pressured significantly."

This sobering result has forced MetroPCS to put off promoting its LTE phones and network until, as Linquist said during the company's quarterly conference call, "[W]e can mainstream our LTE For All initiatives with affordable handsets later this year." Until then, he said, "[W]e intend to focus on operating margins and free cash flow over subscriber growth."

While MetroPCS at least was still able to post a profit, Leap Wireless (Nasdaq: LEAP  ) deepened its losses to $1.28 a share -- worse even than analysts' estimates of $0.98 a share. As it did for MetroPCS, Leap's disappointing quarter also came on the heels of a much better Q1 2011.

Both companies also saw an abrupt drop in net additions to their subscriber bases. MetroPCS gained only 131,000 new customers, a 31% decrease in new adds from the previous quarter -- in spite of its promotional activity. Leap's customer growth fell by 22%.

The prepaid industry segment has always appealed to the customer seeking the least expensive wireless service, but with the nation's economy still sputtering along, customers may be seeking even cheaper alternatives.

But how low can one go? MetroPCS began offering a $25 promotional plan last month that featured unlimited talk and text. The phones offered with this plan cost from $39 to $59 and are feature phones, not smartphones.

Another threat
As if the prepaid folks didn't have enough on their plates, they now has to contend with competition from the deeper-pocketed major national carriers. Verizon (NYSE: VZ  ) has just launched a new prepaid smartphone plan: $80 a month with unlimited voice, texting, and 1 gig of data. The company's previous prepaid plan cost $95 a month with the same features but without a data plan. The 3G phone -- the Samsung Illusion -- will cost $170.

And there's trouble, too, with a capital "T," from AT&T's (NYSE: T  ) new prepaid plan. A customer can buy an LG Thrive 3G phone for $150 and, with a month-to-month payment of $75, get the same features of Verizon's plan.

A somewhat comparable MetroPCS plan would cost $50 a month for unlimited voice, text, and data -- a caveat being that the first 2.5 gigs of data will be at 4G LTE speeds, and after that the speed is reduced. Three 4G LTE phones are offered between $200 and $300.

Leap's Cricket brand offers its smartphone plan for $55 a month with unlimited voice and text, and 1 gig of data at 3G speed. Phones cost between $100 and $230.

It's the network, stupid
Though the prepaid carriers do offer cheaper plans than the major carriers' prepaid plans, if a potential customer takes into account the size of the larger carriers' networks -- especially their LTE networks -- then once those prices come down even further, the prepaids might find themselves being squeezed rather hard.

In the dog-eat-dog fight for spectrum, Verizon and AT&T could use their prepaid strategies as a way of forcing the smaller carriers into getting out of the business and selling their spectrum licenses. I think keeping an eye on what AT&T and Verizon do in terms of lowering their prepaid plans even more will be a baromoter as to how well MetroPCS and Leap will do in the coming quarters.

Whether MetroPCS and Leap can pull themselves back up or not, there will always be a need for mobile devices -- and the parts that make them work. The Motley Fool has released a free report called "The Next Trillion-Dollar Revolution. Don't miss out on this report. Get it today!

Fool contributor Dan Radovsky owns shares of AT&T. The Motley Fool has a disclosure policy.
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Read/Post Comments (2) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 04, 2012, at 10:25 AM, motleyinfo7 wrote:

    This article misses the point big time. Now lets say it is true that the Big 3 ( AT&T, Verizon and T-Mobile) are eatting the customers, but than why is it that the numbers at AT&T and Verizon for their prepaid and Postpaid to a lesster degree showed completely flat net adds. Nearly all the customers were upgrades in that field.

    The story is a lot different than what this fool reveals. The issue is actually coming from MVNO power which is flexing its muscles like a Gorilla in a petting zoo.

    MVNOs such as Simple Mobile ( ) and H2O Wireless have been adding customers like wild. Just earlier in the year Simple Mobile was named the fastest growing carrier ever in the history.

    While these MVNO numbers are hidden deep in the balance sheet or not reported at all since they are all private, they are fissting it all the to the majors (Verizon, AT&T and T-Mobile) and the minors (Cricket / MetroPCS) and don't even get me started on the losers (Sprint) that has never made a profit in the last three years and will never make another profit and on its way to bankruptcy as absolutely everyone knows unless you are living inside the rocks.

  • Report this Comment On May 06, 2012, at 3:50 PM, cbglobal wrote:

    While Leap has it own 3G network in some parts of the country, it is also a Sprint MVNO covering the whole country.

    I live in Alexandria, VA. Amazing town, except its one major embarrassment. That being the home of the Motley Fool. I have been thinking of going to a city planning meeting and proposing that the city ask them to leave town for being a blight on the community.

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