MetroPCS, Leap stung by aggressive tactics of competitors

[1]Oh what a difference a quarter makes. Just last week when I revisited our 2009 predictions [2], I said that we had "hit the nail on the head" when we predicted that low-cost operators such as MetroPCS and Leap would continue see strong growth in 2009 due to the popularity of their flat-rate pricing. Based on first quarter net adds, I thought this prediction was solid.

But yesterday that sunny outlook turned bleak with the release of both Leap and MetroPCS' second quarter earnings results. In the second quarter MetroPCS' net adds were just 206,000, down from the record 684,000 it had in the first quarter. Likewise, Leap netted 203,000 new customers in second quarter, down from 493,000 net adds in first quarter.

In addition, both suffered trouble at the bottom line. MetroPCS reported a 48 percent decline in net income, to $26.2 million, from the $50.5 million it posted in the year-ago quarter. Leap had a net loss of $61.2 million in second quarter, more than double the $24.6 million it lost in the second quarter of 2008.

The culprit behind this dramatic twist of fate appears to be aggressive tactics of competitors Boost Mobile and TracFone Wireless. Both of these players have pushed the price points down on unlimited rate plans and attracted significant attention from consumers. In the second quarter, Sprint reported it added 938,000 prepaid iDEN customers, most likely due to the popularity of Boost Mobile's unlimited play.

Boost initiated the battle in February when it launched a $50 per month unlimited voice, text and data plan over its nationwide iDEN network. It also has been aggressively adding more retail distribution points. Likewise, TracFone Wireless earlier this summer unveiled a prepaid, nationwide unlimited offering for $45 per month that includes unlimited text messaging and 30 MB of data. The service is available at participating Wal-Mart stores.

MetroPCS responded to TracFone's offer in late July by dropping the price of its monthly unlimited plan to $40 [3] for limitless voice, texting and Web access. But that rate drop wasn't quick enough to make a dent in the carrier's second quarter results. And it's unclear what impact all this price cutting will have on the firm's third quarter results.

Whether management at Boost, Leap, MetroPCS, TracFone want to admit it, there is clearly a price war under way for the unlimited prepaid customer. And I suspect that the industry may have reached the limit on how many prepaid unlimited providers it can support. Clearly, the Tier 1 players are not losing droves of postpaid customers to their prepaid counterparts or we would have noticed that trend in their second quarter earnings. Have we saturated the market for prepaid unlimited plans? --Sue [4]