Wireless upstarts MetroPCS (PCS) and Leap Wireless (LEAP) have so far been tiny thorns in the side of nationwide giants like AT&T (T), Verizon Wireless (VZ, VOD), and Sprint Nextel (S). Will MetroPCS and Leap be more formidable together?
MetroPCS has offered to buy Leap in an all-stock deal worth about $5.5 billion; it would also take on about $2 billion of Leap’s debt. MetroPCS thinks the combined carriers could spell trouble for big wireless companies, which still get about 80% of their revenue from voice service and are charging a lot more for it than MetroPCS and Leap. But the big carriers don’t need to sweat quite yet.
It’s true that both companies offer lower-priced offerings than the big guys. In Orlando, for example, MetroPCS offers unlimited local calling for $30 per month and unlimited long-distance calling for $40 per month. Meanwhile, AT&T and Verizon Wireless each advertise a plan that includes 6000 minutes per month, plus free nights and weekends, for $200 per month, and Sprint offers 2000 minutes, plus free nights and weekends, for $100 per month.
But very few people spend $200 per month on wireless service, or even $100. The average mobile phone bill for voice services is $45 per month, according to consulting firm Chetan Sharma. Which is about what MetroPCS customers spend altogether. If the big guys want to match up with MetroPCS and Leap, they can add more minutes to their plans without much pain.
Meanwhile the big carriers still have advantages over MetroPCS and Leap, like high-speed data networks and deals for exclusive, trendy phones, and entertainment packages — which drive non-voice revenue, which is where all the carriers’ growth is coming from. For example, MetroPCS customers won’t be able to use Apple’s iPhone for several years, if ever. And as telcos build out their fibre-optic networks to sell residential TV service and faster Internet access along with home phone service, they could offer bundled packages that minimize any savings offered by MetroPCS or Leap.
And MetroPCS/Leap will have one formidable obstacle of their own to hurdle: The cost of expansion. MetroPCS’s press release notes that the combined companies would own spectrum licenses covering almost all of the top 200 markets. But that’s not the same as actually having a nationwide network. The two companies, which combined have 6.1 million subscribers, are absent from many of the country’s big markets: New York City, Chicago, Los Angeles, etc. Building out out networks in those areas, and marketing in them will be an expensive proposition. MetroPCS spends about $125 to acquire each customer, while Leap spends about $180 — numbers that will surely climb if the companies are to grow.