TELECOM REPORT: For Cheap Mobile Carriers, Down Is Up

By Jeffry Bartash

WASHINGTON (Dow Jones) - Worried by a deepening recession and the security of their jobs, many Americans are taking a hard look at their wireless and total phone bills.

That's good news for one group of companies - discount wireless-phone carriers such as MetroPCS Communications Inc. and Leap Wireless International Inc.

Discount mobile carriers represent one of the few growth industries at a time when unemployment is soaring, consumers are hunkering down and businesses are going on a fast - that is, those companies that survive.

Early Thursday, MetroPCS (PCS) officially posted fourth-quarter results, which included a previously announced gain of 520,000 net subscribers, a company record.

More important, the Dallas-based carrier forecast a net gain of 1.4 million to 1.7 million net subscribers for 2009, which could top 2008's net increase of 1.4 million.

After markets closed Thursday, Leap followed up with a rosy outlook of its own. Although the company's fourth-quarter loss tripled, Leap predicted a net increase of more than 1.5 million customers in 2009, compared to a gain of 941,000 last year.

The success of Leap and MetroPCS no doubt stems in part from the recession. Lots of customers, especially those who've lost their jobs, are trying to cut expenses.

Plans at discount carriers, for instance, start at $30 and do not require annual contracts. And unlimited local and long-distance service can be obtained for as little as $40 a month - compared to $100 at AT&T Inc. or Verizon Wireless.

That explains their growth.

"With unemployment rates continuing to rise, it is important for people to have wireless service that's predictable, affordable and flexible," MetroPCS Chief Executive Roger Linquist said in a conference call Thursday.

"We believe the economy will continue to be difficult for the foreseeable future and we believe we are perfectly positioned," he added.

Ditto for San Diego-based Leap (LEAP), which added 385,000 customers in the fourth quarter. Between Leap and MetroPCS, they now serve more than 9.2 million customers - and both carriers are expanding.

"They've always been clear with their message: cheap voice," noted Jane Zweig, veteran wireless consultant who runs The Shosteck Group.

The performance of these discount carriers is reflected in their stocks. Shares of MetroPCS have risen 38% since a sharp plunge in late November triggered by the financial panic. Leap has surged almost 90% in the same span.

Moving into mainstream?

Their success has not gone unnoticed by competitors. Sprint Nextel Corp.'s (US-S) Boost Mobile prepaid service recently unveiled a $50 flat-rate monthly plan and T-Mobile USA Inc., the nation's fourth largest mobile operator, is experimenting with its own version.

Despite their growth, discount carriers are still dwarfed by the largest carriers, which mainly sell so-called postpaid plans in which subscribers sign annual contracts and pay at the end of each month. AT&T (T) and Verizon serve more than 150 million customers.

Unlike in Europe, prepaid and discount plans have never gained a strong foothold in the U.S. The market is bigger than a niche but doesn't qualify yet as a mainstream product, either.

Naturally, the bigger operators would prefer to keep it that way. Postpaid customers are more profitable and the practice of annual contracts assures AT&T and Verizon (VZ) of a certain amount of revenue each month.

Both companies offer prepaid plans, but they do not market them heavily. Instead, they've focused lately on upgrading customers to more expensive data and Internet plans or smartphones such as the Apple iPhone or new BlackBerrys.

So far, executives at AT&T and Verizon say they have not seen much change in the behavior of their wireless customers.

"That's not something that we're going after strongly. And I don't see it having any impact or at least a negligible impact to date," said Verizon Chief Operating Officer Denny Strigl, referring to the discount market, after first-quarter results were posted last month.

The big wireless carriers certainly offer advantages. Unlike MetroPCS and Leap, their networks cover the entire country and they are generally faster, if not more reliable. It's doubtful that business customers in particular would defect to low-cost carriers.

Where AT&T and Verizon are more likely to get hurt is in their old wireline businesses, which have been shedding customers at an accelerating rate. In the fourth quarter, for example, each reported double-digit declines, on a percentage basis, in primary local phone connections.

More and more consumers are canceling landline service, partly to save money and partly because they don't use them as much anymore. It's a double whammy when they use a discount carrier as their primary phone service.

Whether such trends persist remains to be seen. The economy will eventually recover and most Americans are locked into contracts that are expensive to break. For now, though, the discount carriers are generating more business than ever before.

"Phone service will be a factor in people's economic planning, especially if they lose their jobs," Zweig said.