Leap: Advanced smartphones prompting business model changes

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No-contract carrier Leap Wireless (NASDAQ:LEAP) is taking a hard look at its basic business model--from service activation to device financing--as it works to better accommodate customer adoption of more sophisticated smartphones, according to Doug Hutcheson, president and CEO.

Doug Hutcheson

Doug Hutcheson

"As we've gotten into more sophisticated devices, it's required a lot of effort on our part to smooth out and improve the activation process," said Hutcheson during the Citi Global Internet, Media & Telecommunications Conference in Las Vegas.

"As of December, we had 70 percent of the mix on smartphones," he said. And as customers adopt more sophisticated smartphones, "that's causing us to have to look a lot harder at how do we reduce that out-the-door cost, how do get the device into consumers' hands at a lower cost," added Hutcheson.

He said the company wants to extend the great value of its rate plans to devices, so it can make it easier for customers to buy advanced smartphones and, thus, drive improvement in Leap's gross adds.

Leap is seeing some churn improvement, but the company needs another quarter or two to see that progress evolve. "We have a lot of work to do on the gross add line. I really think that hasn't moved along as much as we would like it to," said Hutcheson, noting the company is hoping its new device financing initiatives will help it attract more customers.

Highly desirable devices sell for as much as $500, which prompted Leap, as well as its no-contract rival MetroPCS (NYSE:PCS), to introduce device financing in the fourth quarter. In December, Leap's Tyler Wallis, senior vice president of marketing and product development, said the Cricket carrier is working with Progressive Finance.

Leap is focused on differentiating its product positioning and offering financing to sell devices without subsidizing. "The program that we've got in place is a start but not where we need to get to," said Hutcheson. The operator will continue to put programs in place to try to drive "the most profitable growth" with higher-end customers, he added.

The company is seeing strong uptake in its Muve Music service, which now has 1.1 million subscribers who can download an unlimited number of songs onto their Cricket phones. The offering is included in Leap's prepaid smartphone plans, which start at $50 per month. Once people build their music library, they are more likely to stay with Leap, which is helping improve its churn figures, said Hutcheson.

Operationally, Leap is all about maximizing cash flows this year, and its unused spectrum could provide some options. Leap's spectrum portfolio encompasses several million MHz POPs, about 40 percent of which are in the 1900 MHz PCS band and 60 percent 1.7/2.1 GHz AWS band, said Hutcheson.

About 60 percent of Leap's spectrum holdings are not being used. "We're thinking really hard about how to use that to add to the enterprise. Clearly that spectrum has significant value, and how do we use that to create partnerships and look at other things is something we are all very attentive to," he said.

Further, Hutcheson acknowledged Leap is eyeing a variety of alternatives for some of its underperforming markets.

Leap rolled out an additional 21 million to 22 million covered LTE POPs during the fourth quarter of 2012 and has begun advertising LTE in those markets. The operator also improved its 3G CDMA network speed. Leap has not announced plans for its LTE 2013 rollouts, but Hutcheson pledged there will be more action on that front. The operator added two new LTE devices in late 2012 and will add two or three more in the first quarter of 2013.

For more:
- see this Leap release
- listen to this webcast

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