Wireless

q&a Leap Wireless is finally in the right place at the right time.

The company, which sells its prepaid service under the Cricket and Jump Mobile brands, has been in the wireless service market since 1998, when it was spun off from mobile chipmaker Qualcomm. It filed for Chapter 11 protection in 2003 and was restructured and emerged from bankruptcy protection a year later.

Doug Hutcheson, CEO of Leap Wireless

(Credit: Leap Wireless)

Now the company is strategically expanding its network into 14 new markets with spectrum it won in two recent Federal Communications Commission auctions. It now operates in 29 states and holds licenses in 35 of the top 50 U.S. markets, including Chicago and Philadelphia, where it recently launched service, and in Washington, D.C. and Baltimore, where it plans to launch soon.

And all of this happening as Americans are getting fed up with lengthy and expensive wireless contracts from national carriers, such as AT&T and Verizon Wireless. And as finances tighten, people are looking to reduce their monthly expenses by finding cheaper options for phone service. Prepaid service plans, which allow customers to pay in advance for service without signing a contract, provide a good alternative. Low-cost unlimited plans, from Leap and others, make it an easy choice even for wireless subscribers who talk and text a lot.

I recently chatted with Leap CEO Doug Hutcheson to get his take on the prepaid wireless market and get his thoughts on the future of the industry. Below is an edited version of our conversation.

Q: Prepaid cell phone plans are getting a lot of attention lately. Why do you think that is?
Hutcheson: The prepaid cell phone market is in its third or fourth phase of development right now in the U.S. And it's at the same phase that the European market entered about five or six years ago. Prepaid really started to take off in Europe as wireless penetration started to reach 100 percent. And of course the economic realities of today are also a factor. For a number of people, prepaid wireless is the best value.

Do you think prepaid carriers, such as Leap Wireless, are in a position to threaten the nationwide incumbents, such as AT&T or Verizon Wireless?
Hutcheson: I don't think we are a material threat to either AT&T or Verizon Wireless. They have built great, broad franchises with 80 million customers. What we are trying to do is focus on our customer base, which tends to be younger and more ethnically diverse with people at the median to below median household income level. We serve this market really well. And this is a customer base that others aren't as interested in serving or aren't able to focus on. These operators have their own prepaid products, but I think AT&T's primary focus is on selling iPhones and two-year contracts. And Verizon is focused on its 4G rollout and combining those services with its Fios fiber network.

Correction: Virgin Mobile began selling its $50 unlimited plan in April after the first quarter had ended.

Competition in the prepaid cell phone market is heating up, making it more difficult for companies, like Virgin Mobile USA, to hold onto subscribers in an increasingly crowded market.

Virgin Mobile USA, a longtime player in the prepaid cell phone market, reported Monday it had lost a total of 133,292 net customers during the quarter to end the period with 5.2 million subscribers. Even though subscribers were up 2.8 percent compared with last year, the company's losses during the quarter point to growing competition in the prepaid market.

The market appears to be especially competitive when it comes to flat-rate, contract-free wireless services. Regional players Leap Wireless International and MetroPCS, which have long offered cheap flat-rate services, reported strong subscriber growth during the first quarter, as they each expanded into new markets. And Sprint Nextel's Boost Mobile, which began offering its $50 unlimited plan in January, also added about 764,000 new subscribers in the first quarter.

Virgin Mobile, which had been successful in the past selling pay-as-you-go service in the U.S. market, lowered the price of its all-you-can-eat plan in April to $50 a month, as well. The company also launched the Pink Slip Protection program, which offers customers who have lost their jobs free service for three months.

Virgin Mobile has managed to improve its churn rate, or the rate at which subscribers leave its service. The company reported that its churn fell to 4.8 percent from 5.1 percent during the same period a year ago.

The company sees the $50 flat-rate plans and other "hybrid" plans, which offer a set number of minutes at a standard price without a contract, as its growth engine for the future. Chief Executive Dan Schulman said that 55 percent of the gross customer additions during the quarter came from "hybrid" plans, according to the Wall Street Journal.

This makes sense given that consumers say they are considering prepaid cell phone services as a way to reduce costs and avoid lengthy carrier contracts.

With prepaid carriers enjoying good times in this recession, Sprint Nextel subsidiary Boost Mobile is preparing to reap the benefits. Matt Carter, Boost's president, told Reuters that his company will open 50 new retail stores by the end of the year.

The new outlets, which will open around the country in cities like Atlanta, New York, Chicago, and Philadelphia, will only sell Boost phones and services. Currently, Boost operates just three stores in Miami, Los Angeles, and Houston. Boost products are available at some Sprint retail locations, but they're typically regulated to a corner of the store.

Boost has been aggressively expanding its offerings in the past few months. In January it announced a $50-per-month unlimited plan for calls, texts, and data.

Prepaid wireless providers are scooping up subscribers as cash strapped consumers downgrade to lower cost cell phone service.

First quarter earnings reports from MetroPCS Communications and Leap Wireless on Thursday provided further evidence that consumers are flocking toward no-contract, unlimited prepaid services. These carriers, which operate primarily in smaller urban areas, each reported they had nearly doubled their subscription rate compared to a year ago.

MetroPCS said its new subscriber additions increase 51 percent compared to the same quarter a year earlier. In total it added 684,000 new subscribers, bringing its customer base to 6 million. This was the third quarter in a row in which the company had a record breaking increase in subscribers.

Leap Wireless, which sells its service under the Cricket brand, also had a big quarter, increasing subscribership by 40 percent compared to the same quarter a year earlier. In total, the company added 493,000 new customers, ending the quarter with 4.3 million wireless subscribers. A year ago, Leap ended the first quarter with 3.1 million customers.

MetroPCS increased revenue 20 percent to $795.3 million and posted earnings of $44 million.

Leap actually posted a wider first quarter loss, mostly due to the company's expansion into new markets, such as Chicago and Philadelphia. The company lost $47.4 million, or 74 cents a share, compared a loss of $16.9 million, or 28 cents a share, in the first quarter of 2008. Revenue increased 25 percent to $587 million.

All of this news comes just days after Sprint Nextel reported huge subscriber gains in its prepaid service from its subsidiary Boost Mobile. Boost added about 764,000 customers to its service.

What all three services have in common is that they offer low-cost, prepaid plans with all-you-can-eat voice, text messaging, and Web browsing. The Boost Unlimited service, which launched in January, costs only $50 a month. And MetroPCs's and Leap's services are in the same neighborhood.

Based on these strong subscriber numbers, it appears that consumers are looking for more affordable cell phone plans. This is likely a direct result of the ailing economy, which has resulted in high unemployment throughout the country.

While it's true that cell phone service has become essential for most Americans, that doesn't mean consumers are willing to pay a lot of money for it. And as finances tighten, people are looking to reduce their monthly expenses by finding cheaper options for phone service. Prepaid service plans, which allow customers to pay in advance for service without signing a contract, provide a good alternative. And now the low-cost unlimited plans make it an easy choice even for wireless subscribers that talk and text a lot.

MetroPCS and Leap Wireless have each been offering their low-cost prepaid unlimited plans for quite some time, but as these carriers move into bigger markets, such as Chicago, Philadelphia, and New York, they are putting pressure on other wireless operators to match or beat their prices.

Sprint's Boost was the first to answer that challenge with its $50 unlimited plan. Virgin Mobile followed with its own all-you-can-eat plan for $50 a month. And T-Mobile USA, owned by Deutsche Telekom, is also getting more aggressive with its prepaid cell phone plans.

The question now is whether the two biggest cell phone companies, AT&T and Verizon Wireless, which make millions of dollars in profits from postpaid subscribers, will also go after the prepaid market. And if they don't, will they slash prices on their postpaid contract service plans? AT&T is already rumored to be considering lowering the price of its iPhone service plan by $10 when the new iPhone comes out this summer.

It looks like Boost Mobile's new $50 unlimited calling plan has become a victim of its own success.

Customers using the prepaid wireless service, which is owned by Sprint Nextel, say that they've experienced delays in receiving text messages. The problem was first reported by the Associated Press. A Boost representative acknowledged that since March, some customers have experienced text delays that have lasted anywhere from a few minutes to a few hours.

"We've already diagnosed and isolated the problem," said John Votava, Boost's spokesman. "And we've been working day and night since late March to fix the problem. Our technical team has been upgrading the network, and they've told us that the work will be completed by May 7."

Boost began offering its unlimited monthly service January 22. The $50 service, which doesn't require a contract, and costs only $50 for unlimited voice, SMS, and MMS messaging, and Web browsing, has proven to be very successful, the company has said. Exactly how successful, won't be known until Monday when Boost's parent company Sprint Nextel reports first quarter 2009 results. But analysts are expecting the subsidiary to report that it's gained about 500,000 new subscribers in the first quarter. As of the end of the fourth quarter of 2008, Boost had 3.6 million subscribers.

"To be honest, we were overwhelmed by the number of people signing up for the unlimited service," Votava said. "People have really been taking advantage of the unlimited texting, as they should, and it has caused us some growing pains."

Votava said delays have occurred most often during peak hours, which are from 2 p.m. EDT to about 10 p.m. EDT.

Boost uses the Nextel portion of Sprint's network for its service. Nextel uses a technology called iDEN, which differs from Sprint's PCS network, which uses CDMA. Over the years, Nextel users have complained occasionally of delayed text messages, the AP reported. But Votava said that Boost, which has used the Nextel network for its service since it launched in 2002, has not had any problems over the past seven years with delayed text messages. He said the problems only started occurring after the $50 offer went nationwide.

The AP reported that several customers are upset and frustrated with the service, but many say they won't drop the service because it's so affordable.

At $50 a month, the service is indeed a bargain. But Boost will need to fix this problem if it expects to compete with other low-cost providers, such as MetroPCS Communications and Leap Wireless International. These regional operators have long offered unlimited calling for roughly $50 per month in some areas. And now they are expanding their services into bigger cities in the Northeast. Boost also faces competition from Virgin Mobile, which followed Boost with its own $50 all-you-can-eat prepaid plan. T-Mobile USA is also offering a similar service to its existing customers in an effort to keep those customers.

Prepaid wireless customers usually have to settle for the most basic cell phones. But soon, Boost Mobile consumers won't have to sacrifice style and function for value.

(Credit: Boost Mobile)

Boost announced Monday that it will offer its prepaid customers the Motorola Stature i9. This thin flip phone is one of the most advanced devices available for prepaid consumers.

Prepaid phone services, which don't require a contract or a credit check, are geared toward value customers or those with questionable credit. So wireless operators typically only offer basic, inexpensive phones to these users, because operators don't subsidize the cost of the phones.

The conventional wisdom has been that consumers wouldn't be willing to spend a lot on advanced devices for a service that they could terminate at any time. But now, as consumers tighten spending and look for ways to reduce their monthly bills, they are gravitating toward prepaid and no-contract services.

Boost, which is owned by Sprint Nextel, recently launched an unlimited talk, text, Web, and walkie-talkie service for $50 a month. This is a huge value over other all-you-can-eat plans. Sprint offers its All-In plan for $99 a month. AT&T, T-Mobile USA, and Verizon Wireless also offer similar plans for about $100 a month.

The new plan offers wireless users an attractive alternative to the more expensive contract services. But until the i9, Boost has lacked a set of advanced, cool phones. Now, the wireless operator hopes it can pick up new customers who might be willing to pay a bit more for a phone, if they can reduce their monthly service and not have to deal with a contract. The i9 will cost about $300 when it goes on sale at the end of February, but it doesn't require a contract. Consumers have several options for payment that include either paying by the week, month or day for service.