Wireless

Big Internet service providers don't seem to be interested in applying for federal stimulus funds, but smaller players like Leap Wireless are looking at the grant program as an opportunity to provide wireless service to underserved populations.

Prepaid wireless carrier Cricket Communications, which is owned by Leap Wireless, on Monday filed an application with the nonprofit organization One Economy for $8.6 million to help it expand a program called Project Change Access. This project, which launched last fall in Portland, Ore., has helped low income residents get online to improve their access to education, job training programs, health care, and social assistance, according to Leap.

The federal funding is expected to pay for about 80 percent of the cost of expanding the program to five other cities. Specifically, the plan is to provide high-speed wireless Internet access to 23,000 low-income families in Baltimore, Houston, Memphis, San Diego, and Washington, D.C.

Leap said it submitted its proposal to the National Telecommunications and Information Administration, which is overseeing the allocation of $7.2 billion in broadband stimulus grants. These grants are part of the bigger $787 billion stimulus package that Congress passed earlier this year. The government recently extended the application deadline to August 20 for applications for the broadband stimulus grants.

Much of the money is intended to help bring broadband access to rural areas where it's traditionally been difficult to get broadband service, as well as help provide affordable access and education to people who can't afford broadband access.

What makes Cricket's application interesting is that many larger Internet service providers and wireless operators are not applying for funds.

According to a recent article in The Washington Post, AT&T, Comcast, and Verizon Communications aren't expected to apply for funds at least in the initial round of funding. The companies aren't talking publicly about their decision. But the Post reported that the companies are leery about possible strings attached to the federal money that would include Net neutrality conditions. The companies also supposedly don't want to deal with unwanted scrutiny from the government and the public on how it builds out its network.

"We are concerned that some new mandates seem to go well beyond current laws and FCC rules, and may lead to the kind of continuing uncertainty and delay that is antithetical to the president's primary goals of economic stimulus and job creation," Walter McCormick, president of USTelecom, told the Post. USTelecom is a trade group that represents AT&T and Verizon.

Meanwhile, some companies affiliated with these bigger service providers are expected to ask for grant money. Clearwire, a company that is backed by some big service providers like Comcast, Time Warner Cable, and Sprint Nextel, said it plans to apply for stimulus grant money. But an executive recently said that the money received for broadband stimulus would have to be used outside its current expansion plan.

Even though Verizon doesn't seem interested in taking any government money now to help build networks to reach underserved customers, the company says its new 4G wireless network will reach more rural customers than its existing wireless network. And due to conditions established by the Federal Communications Commission on spectrum Verizon will use build this network, Verizon will have to make the 4G network more open than its traditional wireless network.

Still, even as Verizon pledges to offer more wireless access to rural customers, it is actually selling off traditional phone lines in rural areas. And even though it is required to make its 4G wireless network more "open," the company still opposes new rules or legislation mandating Net neutrality.

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.

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.