Long live flat-rate pricing?

Long live flat-rate pricing?
MetroPCS said it expects to raise more than $1 billion when it floats its IPO this week. According to filings with the SEC, the flat-rate operator plans to sell 50 million shares for a price between $19 and $21 per share, and another 7.5 million shares are subject to an over-allotment option granted to the IPO's underwriters.

MetroPCS, a bankruptcy survivor from the C-block PCS days, covers about 140 million pops and supports about 3.4 million subscribers. The operator plans to use the proceeds to build out new markets. During Auction 66 last year, MetroPCS paid $1.4 billion for the spectrum that covered six of the 25 largest metropolitan areas in the U.S.

Both MetroPCS and Leap Wireless, another flat-rate operator, are enjoying some nice successes. For the year ending December 31, MetroPCS reported net income of $53.8 million on total revenues of $1.55 billion. Leap, which has been public since 1999, announced a net loss for the full year but revenues and subscriber additions increased. Revenues for the full year came in at $1.14 billion, an increase of nearly 25 percent from 2005. Leap added 592,237 in 2006, and now has more than 2 million customers. It too bid aggressively in Auction 66 and has big plans for market expansion.

Indeed, these two CDMA operators are attracting a plethora of customers who want simple calling plans with no long-term commitments. They are also unexpectedly bringing in some higher tier customers as well. Leap noted that in fourth quarter last year, 60 percent of its subscribers were on a monthly plan costing $45 or more and that most new customers were signing up for packages in that range. MetroPCS says more than 80 percent of its customers are on its $40 or $45 rate plans.

We've seen this story before, however. Leap saw similar successes, as the little darling of the carrier industry, with its flat-rate offerings in the late 1990s. It ended up filing for Chapter 11 bankruptcy in 2003. Granted the company had a compound of troubles then--mounting debt, fraud and an unfavorable arbitrator ruling--but it was also hurt by weakening demand. Nationwide operators began cutting prices, adding bigger buckets of minutes, free long distance and roaming to match the competitive threat coming from Leap.

Leap emerged from bankruptcy in 2004 without the crushing debt load and added services that were more attractive to end users, such as roaming, a better selection of handsets and data services. It is perhaps the greatest comeback story in the wireless industry. Prudential Equity Group recently initiated coverage on Leap with an overweight rating and a $90 price target. The firm said it sees Leap as a compelling growth story and expects its revenues to quintuple over the next 10 years.

But once again bigger operators working to stave off the competitive threats of flat-rate pricing and smaller operators are initiating similar flat-rate strategies to get a piece of the pie. Sprint Nextel's Boost Mobile is trialing an unlimited CDMA calling plan in parts of Texas and California [1] where Leap and MetroPCS have gained traction. CEO Gary Foresee has said that the company plans to use its CDMA network to target sub-prime markets with unlimited calling plans. Leap has been putting a dent in T-Mobile's business in certain markets, causing T-Mobile to respond. Meanwhile, Pocket Communications launched a flat-rate service in Texas last year, prompting Leap to reduce its pricing plans to undercut Pocket's offering in some Texas markets. Pocket's pricing plans start at $28 per month, and it says that it recently surpassed 100,000 customers fewer than nine months after launching service.

Could the value proposition for these players erode? So far MetroPCS and Leap have managed to keep a step ahead with competitive offerings. For instance, Leap's customers can now choose from new plans that offer unlimited messaging and nationwide roaming [2]. Both operators are headed for bigger metropolitan markets, however, that's where nationwide operators are apt to fight more ferociously for their valued market shares.

Let's hope they don't turn into a case of deja vu. -Lynnette [3]